Method and apparatus for enabling individual or smaller investors or others to create and manage a portfolio of securities or other assets or liabilities on a cost effective basis

ABSTRACT

Smaller investors can create and manage on a cost-effective basis a complex portfolio of securities using a mechanism that enables the investor to provide to the system the investor&#39;s preferences regarding his portfolio, to generate a portfolio, including fractional shares, that reflects the investor&#39;s preferences. The system then permits aggregation of the orders, and netting of orders, generated by multiple investors at various times during the day for execution. In addition, the structure of the computer-based system of the present invention allows its cost to be based on access to or usage of the system (such as a monthly fee) as opposed to by securities orders entered into the system as per common brokerage. The result is that the investor can create a portfolio of directly owned securities with attributes, such as diversification, similar to a mutual fund. As compared with the problems with existing systems, the computer-based system of the present invention provides complete control for the investor over what securities can be selected, and in what weights and amounts, as well as control over the tax effects of purchases or sales of the securities comprising the portfolio, preventing the investor from being presented with unwanted taxable effects due to discretionary sales transactions of fund managers. In addition, the computer-based system of the present invention provides all the information necessary to monitor and manage tax effects and capability to sell or buy the individual securities in his portfolio to obtain desired tax benefits, all shareholder rights with respect to each security in the portfolio to the investor and full ownership and control over all investment, voting and other decisions regarding such securities. The computer-based system of the present invention also allows for parameters to be set with respect to a portfolio to ensure that it stays within certain diversification or risk limits. Furthermore, the computer-based system of the present invention provides direct control over the charges and expenses that will be incurred, and the possibility of making multiple intra-day investment decisions by the investor, if he wishes. Moreover, the computer-based system of the present invention provides control over all factors in the portfolio and modification of them as the investor sees fit.

RELATIONSHIP TO OTHER APPLICATIONS

[0001] This is a divisional application of U.S. patent application Ser.No. 09/139,020, filed Aug. 24, 1998, which is a continuation in part ofU.S. patent application Ser. No. 09/038,158, filed Mar. 11, 1998, bothof which are hereby incorporated by reference as if repeated herein intheir entirety, including the drawings.

BACKGROUND OF THE INVENTION

[0002] The present invention relates generally to methods andapparatuses for electronically trading and investing in securities orother assets, rights or liabilities, such as commodities or futures.More particularly, the present invention relates to a method andapparatus for electronically trading over wired and wireless networks,including over the Internet, and investing in securities or otherassets, rights or liabilities that enables a user, at a reasonable cost,to create and manage a complex and diversified portfolio of suchsecurities or other assets, rights or liabilities.

[0003] Currently, small investors generally have two choices with regardto making investments in securities. First, they can acquire directlyshares or derivatives on shares (for example, buy 1000 shares ofMicrosoft or an option on Microsoft stock) or can acquire directly aderivative that derives its value from multiple securities (such as anoption on the Dow Jones Industrials). In this instance of directpurchases (through “brokerage”), the investor is the actual owner of theparticular security or derivative. (Where the investor owns a derivativesecurity, the investor generally has no ownership interest in theunderlying securities, which determine the value of the derivative).Second, these investors can purchase an interest in an intermediary(which interest could itself be a security), such as a trust,corporation or other business vehicle that derives its value frommultiple other securities (such as a trust that contains a portfolio ofstocks like the stocks that comprise the S&P 500, or a portfolio ofother stocks). This second category of intermediary products isprincipally comprised of open-end mutual funds (such as the Fidelity,Vanguard, Scudder and other mutual funds) that invest in othersecurities, but also includes closed-end mutual funds, unit trusts andother vehicles, and is referred to collectively herein as “funds.” Inthis second case where the investing is done through an intermediaryvehicle, the investor owns an interest in the vehicle. That vehicle inturn owns the underlying securities (as in a mutual fund). Each of thesetwo traditional investment strategies—either (i) trading individualsecurities or derivatives through brokerage, or (ii) investing infunds—has disadvantages for the investor, which are described below.

[0004] A. Chief Among the Structural Disadvantages Inherent in the FundProduct Are:

[0005] 1. Inability to Select Securities or Monitor Selection ofSecurities. An investor in a fund is precluded from selecting theindividual securities (or derivatives, which unless otherwise noted arehereinafter included in “securities”) to be included in, or excludedfrom, the fund's portfolio.

[0006] An investor can attempt to select the general type of securitiesto be included in the investor's overall asset allocation by investingin a targeted fund that, for example, states it will invest exclusivelyin companies whose business is primarily computer software. But thatselection still provides the manager of the selected fund with widediscretion to select from hundreds of securities.

[0007] In addition, except for some targeted funds, it is not possiblefor the investor to express any preferences—even general ones—regardingmatters such as social or moral issues (such as not wanting to, or onlywanting to, invest in companies that engage in business with certaingovernments or have operations in certain sectors, such as defense).Even in those few instances where a targeted fund exists for those typesof preferences, the preferences that the investor can have reflectedare, at best, very general with the investor having no ability to selectspecific stocks, either to include or exclude, from the portfolio.

[0008] It is also not possible for the investor to control what specificsecurities a fund will hold in its portfolio, or with what weighting oramounts. An investor could select a fund that reflects, for example, anindex, but the fund then invests in whatever securities, and withwhatever weighting, comprises the index. Consequently, when the investorinvests in a fund, the investor may be investing in securities in whichthe investor would otherwise prefer not to have an interest, or not asmuch of an interest. In addition, an investor that invests in multiplefunds or that holds other investment securities other than solely onefund, will likely be overweighted or under weighted in particularindustries or stocks frequently without his knowledge, and without anymechanism to correct the allocation.

[0009] 2. Inability To Control Tax Effects. An investor in a fundreceives ordinary income distributions at the discretion (subject tocertain legal constraints), and depending on the management style, ofthe fund. Funds that chum portfolios generate more transactions thanfunds that do not, but the taxable distributions are dependent on thefund's activities—not the investor's.

[0010] In most funds, such as typical open-end mutual funds (whichaccount for the overwhelming bulk of all diversified investment vehicleswith such funds holding a remarkable $4 trillion of investor money), nettax gains “flow through” to the investor. In other words, an investor issaddled with whatever flow through tax gain the manager's activitieshave generated—and such gains are taxed at ordinary income rates. Theinvestor has no control over these effects whatsoever, and can be in aposition of having to pay tax on gains earned by the fund even where theinvestor has engaged in no transaction in the fund during the year.Moreover, taxable loses cannot be distributed by a fund—only taxablegains. Consequently, an investor can only receive a tax liability fromthe fund, not a tax benefit.

[0011] To attempt to avoid these problems, some investors withsufficiently large holdings to make it worthwhile can engage in complextax strategies to obtain some flexibility, but those strategies areexpensive to implement and not useful for smaller investors.

[0012] Alternatively, an investor can invest in a fund that attempts tolimit the fund's uncontrollable tax effects. For example, a fund thatengages in no selection of stocks—such as an index fund or a fund thatsimply invests in the largest 500 or 1000 corporations—would have littleturnover from a manager buying or selling securities in order to adjustthe portfolio's holdings. Even in these funds, however, there arepurchases and sales by the fund to reflect redemptions or cashcontributions by investors. As more investors buy into the fund, themanager buys more of the specified securities. As redemptions occur, themanager sells some of the securities to obtain cash to pay to the fundholders who are redeeming their interests in the fund. Consequently, ifthere was a net gain on those transactions, holders in these funds,which are generally tax flow-through funds, will receive a taxable gain,regardless of their desire. (While such a fund has net inflows ofinvestments from investors, there will be no or little tax effectbecause the fund will, almost exclusively, be acquiring securities. Whenthe fund eventually has net outflows, however, limiting the tax effectswill be far more difficult.)

[0013] 3. Inability To Manage Tax Effects. Invariably, some securitiesin a fund will have depreciated while the fund overall has appreciated(or vice-versa). It is not possible for the investor in an appreciatedfund to make the choice to obtain a capital loss by selling depreciatedsecurities (and the fund itself cannot pass through losses). Conversely,it is also not possible for an investor to make the choice to obtain acapital gain by selling the appreciated assets in a fund that hasdepreciated overall. Those transactions in particular securities aremade at the discretion of the fund manager for the fund as a whole andaffect all investors in the fund.

[0014] In those few types of diversified investment vehicles where thetax effects do not flow through, the investor does not obtain any gainor loss from the appreciation or depreciation in the underlying assets.The investor can only sell part or all of his interest in the entirefund, which will either result in a gain or a loss depending on whetherthe fund has appreciated or depreciated as a whole relative to theinvestor's tax basis in the fund.

[0015] In all instances, flow through or not, the investor cannot sellsome of the securities in the fund, and therefore has no ability tomanage for his own benefit the various tax effects that originate fromthe underlying securities in the fund.

[0016] 4. Inability to Exercise Shareholder Rights or Rights RegardingReinvestment or Distributions, Etc. As noted, securities held in a fundare owned by the fund, not the investor who merely holds an interest inthe fund. Consequently, the investor in a fund has no right to vote theunderlying securities, tender (or not tender) them in a takeovercontest, elect to receive a reinvestment of dividends, elect to receivea dividend as stock instead of cash, exercise any preemptive rights, orotherwise exercise any other shareholder franchise or other shareholderright that may exist with regard to the securities held in the fund.

[0017] 5. Inability to Modify or Control Costs. With funds, there aretwo types of charges: Charges levied upon an investor directly forbuying, selling or holding interests in the fund, and charges leviedagainst the fund for managing, advising and providing other services tothe fund. Although an investor may be in a position to regulate to somedegree the charges directly incurred, either by buying or selling lessfrequently, or by buying directly from a fund as opposed to through abroker or other intermediary (such as a bank or insurance company) thatcharges a fee or load, the investor cannot affect or control the chargeslevied against the fund. Those charges which frequently are based on apercentage of assets under management, are paid by the fund and serve toreduce the returns, or increase the losses, of the fund.

[0018] 6. Inability to Make Intra Day Modifications. An investor in afund can make only one investment decision—namely to buy or sellinterests in the fund. Because of the structure of open-end mutual funds(the overwhelmingly dominant type of fund), that decision is effectiveonly once per day. For example, an investor who believes the market isgoing down, or who believes it may be going down during the morning butthen believes it is going up in the afternoon has no mechanism, throughan open-end mutual fund, to buy based on intra-day prices. All open-endmutual funds are priced as of the close of business—in fact prices areavailable for such funds only once per day; and all investors—whetherbuying or selling and regardless of when their order was placed duringthe day—receive a price as of the close of business. This lack ofexecution flexibility is an important consideration for some investorsand one that forces them to use brokerage or other vehicles as opposedto mutual funds for their investing.

[0019] Certain funds other than open-end mutual funds, such asclosed-end funds or some trusts, as well as derivative securities, dotrade during the day and therefore can reflect intra-day pricemovements. Each of these other vehicles, however, has negativecharacteristics that have made them unpopular with investors, includingdiscounts to fair market value of the underlying securities, lesstransparency than open-end mutual funds or relatively unchangeable,static portfolios, and they are not generally viewed as substitutes foran open-end mutual fund. In addition, in these vehicles as well, theinvestor buys or sells only an interest in the fund, not the securitiesowned by the fund.

[0020] 7. Inability to Monitor and Control Risk Levels and “Styles” ofInvesting. An investor in a fund can receive historical information asto risk and returns for the fund. Mutual funds that are activelymanaged—as opposed to passively managed indexed funds or staticportfolio trusts—are managed by individuals, and frequently by teams ofindividuals, making buy and sell decisions. When some of thoseindividuals depart the fund, the “style” of investing of the fund maychange. Even if those individual managers never depart the fund, themarket may present them with fewer or greater opportunities to buy orsell securities under a particular “style” than they had before. Ortheir views as to the market may change and with it their investmentmix. Some investors in these funds accept these changes in style anddirection and view that as part of what they are paying for with themanagement fee. Others, however, attempt to select funds based on thefunds' supposed risk, sector of interest and other factors (includingprevious returns or returns relative to an index). It is not possible tocontrol those factors in these funds in advance, however, unless thefund commits to a mechanical style of investing with extremely limiteddiscretion—which is typical for an index fund but very rare for anactively managed fund.

[0021] 8. Inability to Switch Fund Families or Funds withoutConsequences. Because funds are organized and managed by particularinvestment company advisers, they are proprietary to a particular fundcomplex. Consequently, if for example, an investor were in invested in aFidelity S&P 500 fund and wished to switch to a Vanguard S&P 500 fundbecause, for example, the fees were lower or because for example theinvestor switched jobs and her employer was offering Vanguard instead ofFidelity, then the investor would have to sell all her interest in theFidelity fund and buy an interest in the Vanguard fund. Unless theinterests were held in tax advantaged accounts like a 401(k) account,that transaction would be taxable. Indeed, even switching from oneFidelity fund to another Fidelity fund is taxable (unless the interestswere held in tax advantaged accounts).

[0022] 9. Inability to Manage Multiple Investments As a Whole. When aninvestor is invested in multiple funds, it is very difficult for theinvestor to understand the overall portfolio characteristics of theirinvestment. In other words, many investors may have one or a fewinvestments in funds in 401(k) or other retirement accounts, and then afew other fund investments or individual stock investments outside oftheir retirement accounts. These investors generally do not manage theiroverall portfolio of multiple funds and individual stock holdings as awhole managed portfolio, because it is very difficult to discern theoverall risk and return of the integrated portfolio of multiple fundsand individual stocks. Of course, it is that integrated portfolio thatwill, ultimately, provide returns for the investor. Some investors payto have multiple funds managed by investing in “funds of funds” thatattempt to do that for them. Even here, the investor's portfolio doesnot include, for purposes of determining whether the investor's overallportfolio is being managed well, those funds that are not part of the“fund of funds” complex, or individual stocks held by the investor.

[0023] B. Chief Among the Structural Disadvantages Inherent in theBrokerage Service Are:

[0024] 1. Inability to Create a Diversified Portfolio on a CostEffective Basis. Under portfolio theory, an investor should seek tocreate a diversified portfolio when investing. Diversification providesan investor with a similar return with lower risk, or a higher returnwith the same level of risk, as a non-diversified portfolio. Simply put,portfolio theory dictates that there is no advantage to an ordinaryinvestor in holding a non-diversified portfolio of publicly-tradedsecurities as opposed to a diversified portfolio. Nevertheless, fewsmaller investors are able to create a diversified portfolio. Theobstacles to creating such a portfolio for the smaller investor havebeen the inability of the ordinary investor to be able to craft such aportfolio on his own, combined with the costs of engaging in the tradingnecessary to create and maintain such a portfolio, and the inability toconsummate trades in small quantities needed to create such a portfolio.Consequently, most investors who have understood the benefits, or atleast understood that there is a benefit, from diversification haveturned to mutual funds. And that desire for diversification has been aprimary factor in the explosive growth of such funds, notwithstandingall of the disadvantages of investing in mutual funds as describedabove. Simply put, the concept underlying brokerage has been theselection of individual stocks, not the creation of an interactingportfolio of securities (something which has been left to the funds).

[0025] Costs

[0026] The costs for an individual or smaller investor, or an investorseeking to invest a smaller amount, in attempting to create and maintaina diversified portfolio stem, in part, from the cost of brokerage. Aninvestor buys or sells individual securities by employing a broker. Thebroker purchases the selected securities for the investor directly orfrom a dealer or on an exchange. The costs to a retail investor ofpurchasing or selling a security are reflected in charges that fallgenerally into two categories. (For larger institutional orders, thesetwo costs generally are far lower on a percentage basis relative to theinvestment as compared to a smaller order, but there are significant,additional other costs to these larger orders stemming, for example,from the market impact of the order itself—in other words the ability ofthe existence of a very large buy or sell order to affect the price atwhich the order will be effected by moving the applicable bid-askquotes. Other systems (the OptiMark™ trading system, ITG-Posit, notedbelow) have attempted to address this problem for these largeinstitutional investors.)

[0027] The first set of costs are those charged directly to the investorin the form of the broker's trading commission and fees. The second arecharges levied upon the transaction itself (in terms of a “mark up” or“spread”) between the cost at which the security was acquired by thedealer or the exchange specialist from another investor and the cost ofthe security as it is sold to the investor. This is a cost thatfrequently is “hidden” from investors: Investors do not always realizethat there is, frequently, a spread even when they are being charged acommission. But it can be a significant cost—even exceeding by multiplesthe explicit commission charges.

[0028] Through technology, increased efficiencies and productivity,competition, etc., these costs have been decreasing over time.Nevertheless, all in all costs (including the mark-up or spread) arestill on the order (for the deepest discount broker and for the smallestround-lot of 100 shares) of at least tens of dollars per securitytraded. This is true even where the explicit commissions have beenreduced, in some cases to zero, because the broker-dealer is extractinga high “spread” from the investor that the investor usually is not awareof. Moreover, the current view is that the costs have reached a pricefloor, and without new systems for engaging in trading, such as thepresent invention, the costs will not be reduced much further.

[0029] To create and maintain a diversified portfolio of individualstocks, an investor would have to purchase at least twenty to fiftystocks, and be in a position to add to that securities portfolio on aproportionate basis as new dollars are received to make additionalinvestments, and to re-balance the portfolio periodically as the marketsand the securities change. In other words, an investor would first haveto create a diversified portfolio by purchasing say fifty stocks, andthen continue to purchase stocks in appropriate proportions with anyadditional amounts sought to be invested on, say, a monthly basis, andalso re-balance the portfolio periodically. Obviously, the basicbrokerage costs—even employing the deepest discounted brokerageservices—would be prohibitive for the ordinary investor. For example, tocreate and maintain a diversified portfolio, an investor seeking toinvest $2,000 per month (a relatively high amount for the ordinaryinvestor), would likely incur minimum all-in transaction costs for aninitial fifty stock purchase of at least (and this would be optimistic)$500—or fully 25% of the initial invested amount. Such charges areobviously prohibitive.

[0030] The best that an investor can do with $2,000 per month to investwho does not wish to invest in a fund or a derivative product would beto try to build such a portfolio for lower costs by buying one or twoseparate stocks each month and thereby, over a number of years, create adiversified portfolio. Such a strategy has a number of drawbacks as wellas taking years to implement. An investor could also add to an alreadydiversified portfolio for a lower cost by making subsequent monthlypurchases of just one or two stocks. The drawbacks in terms of lack offlexibility, inability to modify the portfolio, etc.—all similar to theproblems with a locked-in portfolio stemming from a mutual fundinvestment—exist with this strategy as well. Only with investmentsapproaching $10,000 per month—a prohibitive level for mostinvestors—could these costs even begin to be viewed as non-prohibitiveon a recurring basis. Furthermore, smaller investors with limited fundsto invest are biased, as a practical matter, towards stocks whose valueare low, i.e., $10-20 per share (which for a round lot would be$1,000-2,000) as opposed to $100-200 per share (which for a round lotwould be $10,000-20,000), thereby limiting the possible selection ofstocks.

[0031] As a practical matter then, brokerage costs and constraintseliminate the possibility that the ordinary investor can create andmaintain a diversified portfolio on his own—as opposed to through afund, even were the investor to have the tools and skill to be able todo so.

[0032] Capability

[0033] In addition to prohibitive costs, ordinary investors possessneither the skills nor the tools necessary to create and maintain adiversified portfolio with desired risk-return characteristics. Tocreate such a portfolio, an investor needs to understand risk as it isdefined from the perspective of portfolio theory, and have the data andthe mechanism for analyzing the data to employ the theory. That datathen needs to be correctly employed in connection with a trading systemto allow for the cost effective creation and maintenance of theportfolio. There is no brokerage (or other system) that deploys, usesand otherwise acts upon the necessary diversification information,combined with a trading system, so as to be accessible by an ordinaryinvestor. There are, and have been a variety of systems (for example,Schwab One Source (www.schwab.com), Financial Engines(www.financialengines.com) and a new Microsoft site(http://beta.investor.com)) that provide advice to investors as to thecreation of a portfolio of mutual funds based on, among other things,risk, style, performance, and ratings. These systems, however, are notdesigned to enable investors to purchase a portfolio of specificsecurities (as opposed to assisting in the purchase of a few, specificmutual funds, with all the attendant disadvantages of holding mutualfunds) in a cost effective manner, or hold fractional shares insecurities (as opposed to interests in funds), or obtain any of theother advantages stemming from the ability to invest directly insecurities as opposed to funds, all as mentioned above and discussedfurther below.

[0034] 2. Inability to Purchase Small and Fractional Share Interests. Itis possible to acquire small and fractional interests through specificdividend reinvestment plans direct from certain issuers. These plans,however, are run by selected issuers and have a number of significantlimitations, including, for example, average pricing usually over thecourse of weeks or a month.

[0035] Purchasing or selling a security through an ordinary brokeragerequires transactions to be effected in minimum units of whole numbers.In other words, an investor can purchase no less than 1 share of IBM orsell no less than 1 share of General Motors, and purchases or sales mustbe whole numbers such as 27 shares, as opposed to 27.437 shares. Inaddition, costs are frequently prohibitive for small transactions in asecurity (such as 1 or 2 shares) or even for transactions in less than around lot (100 shares). An investor buying a round lot in the ordinarysecurity trading between $20 and $40 would be buying at least $2,000 to$4,000 worth of the security. Buying 50 round lots to create adiversified portfolio requires a greater investment ($100,000 to$200,000) than most investors are able to make. As a specific example,then, an investor wishing to invest $150 per week could, through anordinary brokerage, at best buy 7 shares of a $20 stock, or 3 shares ofa $40 stock, invest the balance in cash, and wait for the next week tobuy a different stock or more of the same stock. But at a brokerage costof, say, just $5 per security traded, the brokerage costs would rangefrom $15 to $35 (a prohibitive 10% to over 23% of the amount to beinvested). This is not a practical alternative. The only alternativethat has been reasonable to date for an investor in this position hasbeen to invest in a fund.

[0036] 3. Inability to Select Individual Securities ReflectingPreferences to Be Included Within a Diversified Portfolio. Using abroker, an individual or smaller investor, or a person investing asmaller amount, obviously can select individual securities for purchaseand sale. Ordinary brokerage, however, does not provide a mechanism forreadjusting an entire portfolio of holdings as a unified portfolio ofinvestments. Consequently, most investors are likely to be overweightedin a particular security or sector because of the costs ofre-configuring their portfolio and an inability to determine the overallprofile of the portfolio. Even if the overall risk and other profilecharacteristics are determined, the investor would usually not be in aposition to act to make the portfolio diversified because of the costissue described above.

[0037] Moreover, ordinary brokerage frequently does not provideassistance to an investor regarding other factors related to a company,such as social, moral or political considerations that would affect theinvestor's choice of whether to buy or sell the company's stock.

[0038] 4. Inability to Obtain Superior Trade Executions. Brokersgenerally execute trades when received, thereby providing “immediate”executions. There are exceptions, however. For example, a trade can be a“limit” order meaning that it can be executed only at a specific priceor better. Limit orders are generally executed immediately whenever theprice reaches the limit. Trades can also be set for execution at the“open” or “close,” meaning the trade will be executed as part of theopening or closing call auction procedures, or upon the satisfaction ofcertain other conditions or at certain other times as the customer mayspecify.

[0039] As a general matter, under applicable regulatory requirements,customers are required to receive what is called “best execution.” Butthat execution may not be the best price they could have received if theexecution system were different. There is frequently a trade-off betweenprice and liquidity. If a customer seeks immediate execution, then theprice may be somewhat less advantageous to the customer than if thecustomer is willing to wait. In addition, if the customer is willing todelay the attempt to execute the order until there are multiple otherorders, then the customer could again obtain a better execution becausethere will be a greater concentration of order flow against which to tryto match the order. A number of specialized brokers (and other tradingsystems) currently permit institutions to hold order flow and try tomatch the held orders at various times. In addition, many brokers sendorder flow to others, such as market makers or exchanges, whoconcentrate order flow so that purchases can be better matched againstsales, thereby providing price improvement or better executions thanmight otherwise occur.

[0040] There are trading systems that attempt to obtain improved tradingperformance for their customers, but these systems serve exclusively asvarious forms of “matching” mechanisms (although sometimes with verycomplicated algorithms) that seek to match buy and sell orders. Theyhold order flow over time or in accordance with specified preferences,such as the Arizona Stock Exchange, which runs periodic call auctions;ITG-Posit, which operates a crossing system that matches buy and sellorders five times a day; and the OptiMark™ trading system, which matchesbuy and sell orders according to various algorithms. In addition, thesesystems primarily, although they need not necessarily, cater toinstitutions and have not been made available to the individual orsmaller investor (although they could be). In any event, as describedmore fully below, they do not provide the missing capabilities discussedabove.

[0041] 5. Failure to Monitor Portfolio Based Tax Effects. Althoughbrokers obviously could monitor the overall tax effects of a portfoliofor their customers, they generally do not. The concept behind brokerageis usually the selection of individual stocks for purchase or sale, notthe creation and maintenance of a diversified portfolio. Consequently,recordation of basis and monitoring gains and losses of securities—ascomponents of a portfolio as opposed to as individual investments—wouldbe unusual and is generally not available in most standard brokerageaccounts. If a customer does obtain that advice, if it is available atall from the broker, it is usually expensive.

[0042] 6. Failure to Assist in Exercise of Shareholder Rights. Similarto the problem with tax effects, brokerage is designed to provideassistance regarding individual security transactions, not othermatters. Consequently, investors are forwarded materials such as proxystatements without any advice or direction from the broker.

[0043] 7. Failure to Limit Portfolio Characteristics. Currently,brokerage is permitted in some self-directed retirement accountsestablished by employers (such as 401(k)s), but not permitted in many.The reason, in part, is that employers are concerned that employees,especially somewhat less sophisticated employees, will not fullyappreciate the risks of investing and may invest in too risky asecurity, or not a sufficiently diversified portfolio, and thereforepotentially lose much or all of their expected retirement. Consequently,employers limit the choices that employees may select by offering them alimited number of investment choices, which because employers want toprovide diversification within each investment vehicle so offered hasgenerally meant, almost exclusively, various types of funds. Brokeragehas not been offered because there was no way to ensure that an employeewould invest in a diversified portfolio with specified maximum risklevels (hence the practice of forcing employees to invest in selectedfunds).

[0044] Previously Existing Systems

[0045] Electronic trading systems are known. The OptiMark™ tradingsystem is a system that allows large institutional investors and otherswho are concerned about potentially moving the market by placing largeorders to place such orders with minimized market impact. It is premisedon the concept of a trader having a utility preference function for aparticular transaction. As an example, the OptiMark™ system works byhaving a trader specify how much above the current equilibrium price heis willing to pay to purchase a block of securities. The system thenattempts to match that trader's transaction preferences with anothertrader's preferences in order to complete a trade. The OptiMark™ tradingsystem therefore engages in price discovery.

[0046] ITG-Posit is an electronic equity-matching system that letsinvestors find the other side of a trade during the market day. Positutilizes mid-point pricing. Buy and sell orders, including individualstocks and portfolios, are entered into the system; five times daily,Posit processes and compares the orders. Posit trades are then priced atthe midpoint of the bid/offer spread (the difference between the bestseller's asking price and the best buyer's bid) in the stock's primarymarket when the match is run. Those orders which match are executed.Investors can keep unmatched orders in the system for future matches orcan electronically route the order to any one of the primary or regionalexchanges, to OTC market makers, or complete the order on an agencybasis. Posit is used by major institutions and broker/dealers. Posit,like the OptiMark™ trading system, is in essence a matching system butPosit matches trades at the mid-point (as determined by a third partysystem) without independent price discovery . It is premised on traderswishing to trade with each other and provides such traders a potentiallybetter execution (because of the mid-point cross) with lower marketimpact (because of the anonymity of the trades and the increasedavailable liquidity based on the concentration of trades within certaintime frames).

[0047] The New York Stock Exchange and the NASDAQ market also bothaggregate order flow at the open and the close of the exchanges to matchorder flow and, of course, concentrate order flow during the day bylimiting the number of persons who can trade a security (one specialistper stock on the New York Stock Exchange so that order flow at theExchange in a particular stock moves through that one specialist, and to“market makers” on the NASDAQ, so that all order flow on the NASDAQ isfocussed on the market-makers).

[0048] Schwab, Financial Engines (and perhaps Microsoft) provideservices that assist investors (such as a participant in a 401 (k) plan)in selecting a mutual fund or creating a portfolio of mutual funds byselecting from among a group of mutual funds available to theparticipant based on risk/return and other factor analysis. Once theanalysis is complete, the participant then selects mutual funds for hisportfolio according to what is permitted by his participation rules (ifit is a 401(k) plan) or through brokers or others offering the funds.Although for Financial Engines and Microsoft there currently is nodirect mechanism for actually executing the desired purchases of fundinterests, Schwab does make available the ability to purchase interestsin the funds directly through Schwab. There is no mechanism, however,for enabling the participant to select, craft, modify and execute aportfolio comprising individual equities: Such an investment in equitiesis a completely different form of investment from an investment in fundswhere, before the present invention, it has not been possible for asmaller investor to acquire or trade individual equities in small orfractional amounts on a cost-effective basis or to manage individualequities as an integrated portfolio as opposed to a series of individualinvestments.

[0049] Portfolio (or cash) management accounts and similar vehiclesexist and are offered by a number of brokerages. They are somewhatmislabeled, however, in that they do not manage portfolios ofsecurities, but simply combine in one reporting statement informationregarding various types of assets held by a customer (funds, stocks,bonds, cash, etc.) and consolidate broker relationships. These accountsprimarily involve linking of various types of services including creditcard, loan, checking/savings, brokerage and mutual fund holdings.

[0050] Programs and databases exist that provide raw informationregarding volatility and other indicia relative to individual stocks andmechanisms for investors to screen stocks to obtain a list of thosestocks that meet certain profiles or parameters.

[0051] Systems exist that allow a user to screen the portfolios ofcertain other parties, primarily certain investment managers that filedocuments with the Securities and Exchange Commission. These systems donot create mechanisms for investors of a system to screencharacteristics of other investors of the system (such as patent lawyersor individuals making more than $75,000) to obtain a composite portfolioor a portfolio comprising composite characteristics of these otherinvestors.

[0052] Systems exist that are designed to create derivatives and futuresthat permit investors to obtain the market risk economic benefits of aportfolio investment similar to that of the current invention. Thesesystems, however, are not currently permitted in the United States forregulatory reasons, introduce credit risk related to the issuer of thederivative/future, provide for different and adverse tax consequencescompared to those offered by using the current invention, do not providefor the exercise of shareholder rights, do not permit the selection ofparticular stocks reflecting non-economic preferences (such as“no-tobacco”), and generally do not substitute at all for the currentinvention.

[0053] Some mutual fund complexes have made available to their customersthe ability to screen mutual funds and determine which fund best fitscertain parameters that they make available that a customer would likesatisfied—and then lets the customer invest in that mutual fund. For theinvestor, this system again suffers from all the disadvantages ofinvesting in mutual funds—as opposed to the underlying securities—asdescribed above.

[0054] Some systems, like Financial Engines, provide tools for investorsto select a number of mutual funds to satisfy certain investment goals.These systems do not provide tools to select a portfolio of individualstocks that, as a portfolio, would satisfy certain investment goals.Moreover, the systems that exist that review mutual funds do not reviewor analyze mutual funds in combination with individual securities, whichis more likely reflective of the actual overall investments held by asmaller investor.

[0055] The present invention is therefore directed to the problem ofdeveloping a method and apparatus for enabling an individual or smallerinvestor, or an investor investing a smaller amount, to create andmanage, on a cost-effective basis, a complex portfolio of securities.

SUMMARY OF THE INVENTION

[0056] The present invention solves the problem of individual or smallerinvestors (which includes investors investing a smaller amount andcollectively referred to herein as “investors”), creating and managingon a cost-effective basis a complex portfolio of securities. The presentinvention does this by providing a computer-based system to which theinvestor provides his preferences, which system generates a portfoliothat reflects the investor's preferences or assists the investor inselecting a portfolio, allows that portfolio to be modified by theinvestor as a whole portfolio and allows the investor to direct that theportfolio or specified individual securities in the portfolio bepurchased or sold or modified as a portfolio transaction. The systemfurther aggregates orders generated by other investors at various timesduring the day for execution, and includes a device for such executionwith investors being allocated specific interests, including smallnumbers of (and fractional shares, if needed in) securities. The systemfurther nets the various transactions so aggregated to provide evenbetter execution and even lower costs.

[0057] According to one aspect of the present invention, a system forenabling multiple individual or smaller investors to create, manage andtrade a portfolio of assets/liabilities includes a processor and astorage device. The processor communicates with the investors viamultiple communication links, and receives investor identificationinformation and preferences and trading data from each of the investors.The processor aggregates all buy or sell orders and all otherwiseeconomically unviable buy and sell orders for each asset/liability inthe trading data from each of the investors to obtain a singleeconomically viable buy order and a single economically viable sellorder for each asset/liability. (As used herein, economically unviableorders include fractional shares, odd lots, and small amounts of sharesthat cannot be normally traded, or cannot be normally traded on acost-effective basis.) The processor then transmits the singleeconomically viable buy order and the single economically viable sellorder to a third party for execution. The storage device is coupled tothe processor and stores the trading data from each of the investors.

[0058] In addition, the processor creates a percentage allocation ofinvestment classes for each investor based on allocation model inputfrom each investor and transmits a resulting percentage allocation ofinvestment classes to each investor. Furthermore, the processorinteracts with each investor to determine an investor portfolio thatcorresponds to the percentage allocation of investment classes for theinvestor. The processor includes in determining its allocations anyinvestments currently held by the investor, including investments inmutual funds or other funds as well as already owned individualsecurities, and includes these investments for the purposes ofdetermining the overall portfolio characteristics of the investor'sinvestments.

[0059] One particularly advantageous embodiment of the above systemincludes an electronic payment mechanism coupled to the processor andfor coupling to a third party electronic payment system. The electronicpayment mechanism transmits a request for an electronic payment for eachof the investors to the third party payment system, and receives, inresponse to the request, electronic payment data for each of theinvestors electronically from the third party payment system. Inaddition, the electronic payment mechanism maintains multiple paymentaccounts, one for each of the investors. Furthermore, the electronicpayment mechanism only permits trading of the assets/liabilities for aparticular investor if the particular investor's payment accountcontains a predetermined amount. Moreover, the storage is coupled to theelectronic payment mechanism and stores the electronic payment data foreach of the investors, and the payment accounts for the investors.

[0060] Further, the system of the present invention can include a secondcommunication link to a third party trading system via which theprocessor transmits the single buy order and the single sell order foreach of the assets/liabilities.

[0061] In addition, the system of the present invention optionallyincludes an investor program executing on an investor's personalcomputer, which program prompts the investor for investor identificationinformation and investor preferences, transmits investor identificationand investor preferences to the processor, and enables the investor tointeract with the processor to select multiple assets/liabilities tocreate an investor portfolio commensurate with the percentage allocationof investment assets. The investor program can include a graphicalinvestor interface displaying a risk and a differential return of theentire investor portfolio relative to standard industry measurements tothe investor and on absolute scales. Also, the investor program enablesthe investor to adjust the percentage allocation of investment assetsand the investor portfolio. Moreover, the investor program communicatesto the processor as trading data via one of the communication linksinvestor identification information along with any trades ofassets/liabilities to be executed to create or modify an investor'sportfolio to ensure an investor's actual portfolio matches an investor'sdesired portfolio.

[0062] According to one aspect of the present invention, the systemstores the investor program in the storage facility and upon request bya new investor transmits the program to the investor.

[0063] According to another aspect of the present invention, theelectronic payment mechanism electronically requests periodic paymentsfrom the third party payment system for each of the investors. Onepossibility is that the periodic payment is a monthly payment or aweekly payment.

[0064] According to another aspect of the present invention, unlike alltraditional brokerages that charge a commission or a fee based on a pertransaction basis, or that receive their compensation (including itemslike payment for order flow) on a per share or per trade basis becausethey make their money from investors trading, the investor under thepresent invention can be charged a flat periodic fee (such as a monthlyor annual fee as might be charged by certain financial planners) or anasset based fee comprised of a certain amount of the assets held in thesystem (such as are usually charged by mutual funds), or a combinationof such periodic and asset based fees, or a combination of such fees anda transaction based fee.

[0065] According to yet another aspect of the present invention, thetrading data can include fractional shares of the assets/liabilitiesdesired to be traded.

[0066] According to yet another aspect of the present invention, theinvestor program maintains tax basis information, including date ofacquisition, for all of the assets/liabilities traded by the investor.The investor program can also provide information to the investorregarding voting rights of the assets/liabilities held by the investor.

[0067] According to one aspect of the present invention, the processorreceives actual trading pricing information regarding the single buyorder and the single sell order for each of the assets/liabilities fromthe third party trading system. The processor then transmits the actualtrading pricing information regarding each asset/liability traded by aparticular investor to the particular investor. In response to theactual trading pricing information received by a particular investor,the investor program modifies the display of the risk and differentialreturn of the entire investor portfolio in accordance with the actualtrading pricing information regarding each asset/liability traded by theinvestor. Based on this information, the investor program recommendsmodifications to the investor portfolio to the investor via thegraphical investor interface to make the investor portfolio match thepercentage allocation previously determined if the investor portfolio nolonger matches the percentage allocation as a result of the actualtrading pricing information received from the processor.

[0068] According to another aspect of the present invention, at leastone of the communication links to the investor includes a communicationlink to the Internet. Furthermore, the system can include a graphicalinvestor interface displayed on a predetermined world wide web site viawhich a new investor can provide investor identification information tothe system. In this case, the processor upon receipt of investoridentification information from a new investor accesses the new investorvia one of the communication links in accordance with the investoridentification specified by the new investor to obtain paymentinformation from the new investor. This communication link can include adirect dial telephone connection, a direct dial-up telephone connectioninitiated by the investor, a direct dial-up telephone connection to anintermediary server, which direct dial-up connection is initiated by theinvestor, and a network connection from the intermediary server to theprocessor initiated by the intermediary server, a first direct dial-uptelephone connection to an intermediary server, which first directdial-up connection is initiated by the investor, and a second directdial-up connection to the processor, which said second direct dial-upconnection is initiated by the intermediary server.

[0069] According to another aspect of the present invention, a personalcomputer based program for executing on an investor's personal computer,for enabling an investor to create, manage and trade a portfolio ofassets/liabilities and for interfacing with a system for managing aplurality of such investors via a first communication link over whichthe investor transmits to the system trading data regarding trades of atleast one asset/liability that the investor desires to make, includesthe following elements. A graphical investor interface prompts theinvestor for investor identification information, and investorpreference data. An asset allocation modeling process creates apercentage allocation of assets for the investor based on the investorpreference data, wherein the graphical investor interface displays viathe computer display multiple assets/liabilities among which theinvestor can select to create an investor portfolio commensurate withthe percentage allocation of assets. A risk and differential returncalculation process calculates a risk and a differential return of theentire investor portfolio relative to standard industry measurements orabsolute values, and provides the relative risk and differential returnto the graphical investor interface, which displays the relative riskand differential return to the investor. A portfolio editor processenables the investor to adjust the investor portfolio. A communicationprocess communicates the investor identification information along withany trades of assets/liabilities to be executed to create or modify aninvestor's portfolio to ensure an investor's actual portfolio matches aninvestor's desired portfolio to the system as said trading data via thefirst communication link. In this program, the graphical investorinterface can display the relative risk and differential return as acolor code, a numerical indicator, an arrow on a dial, or an arrow on arange of numerical values or an arrow on a horizontal or vertical scale.

[0070] According to another aspect of the present invention, the systempermits the investor to adjust the color code, the numerical indicator,the arrow on a dial, or the arrow on a range of numerical values or thearrow on a horizontal or vertical scale, by moving a slide or otherindicator on the graphical investor interface, and by so doing changethe requested risk and return levels for the investor's preferredportfolio. Consequently, the investor can adjust the characteristics ofthe portfolio directly by changing the position of the indicator, andthe system will then store the changed requested characteristics andselect securities for inclusion or exclusion in or from the portfolio,or the weighting of such securities in the portfolio, based on matchingthe portfolio characteristics so selected by the investor with theportfolio characteristics of the investor's portfolio of securities. Inthis instance, the system will recommend or suggest to the investor thesecurities that should be included in the investor's portfolio thatsatisfy the investor's risk and return selections, combined with anyother selections or preferences that the investor may have.

[0071] According to another aspect of the present invention, the systemincludes, in its differential risk and return calculations, securitiesand other investments, including funds, held by the investor that werenot acquired through the system but that the investor notes or describesto the system, in determining the overall portfolio characteristics andin making recommendations or suggestions to the investor as to whatother securities should be included in the investor's portfolio.

[0072] According to another aspect of the present invention, the systempermits a sponsoring organization, such as an employer, to specify thatall the investors in the system of that sponsoring organization (such asemployees in the employer's 401(k) plan) may invest using the system,but that their portfolio must all times meet certain specifications. Thespecifications could include a minimum number of stocks (such as 30), amaximum concentration in any particular stock (such as 5%) and a maximumrisk level (such as no more than 10% more risky than the market asdefined by the S&P 500 risk level). Similarly, the head of a householdcould establish investing accounts for members of the household withsimilar constraints or whatever other limitations along similar lineswere desired.

[0073] According to another aspect of the present invention, the programincludes a configuration control process that provides a version numberof the program to the system in response to a request from the system,wherein the system downloads an updated version of the investor programupon detection of an out of date version.

[0074] According to another aspect of the present invention, a methodfor creating and managing a portfolio of assets or liabilities byperforming a plurality of transactions, includes the steps of: a)obtaining investor preferences for portfolio characteristics of aninvestor; b) employing the portfolio characteristics to describe andselect assets or liabilities to be transacted in multiple transactionsby an investor; and c) aggregating the transactions of a single investorwith the transactions of other investors over an applicablecharacteristic of the assets or liabilities. In this case, thetransactions can be aggregated over a time, such as every three hours,once per day, or multiple times per day at predetermined times. Once thetransactions are aggregated, they are then executed.

[0075] According to another aspect of the present invention, the methodcan include the step of netting the transactions against thetransactions of other investors after aggregating the transactions, andthen executing any remaining transactions after netting.

[0076] According to yet another aspect of the present invention, anapparatus for enabling a plurality of investors to make periodicinvestments in a portfolio of securities includes a processor and astorage device. The processor receives data from each of the investorsregarding amounts of money to be invested in each investor's portfolio,and accesses an electronic payment system upon receiving instructionsfrom an investor to purchase securities to obtain payment for therequired purchases. The storage unit stores each investor's portfolio.This apparatus can optionally include a third party trading systeminterface device that aggregates all investors' trades and sends theaggregated trades as a single trade in each security to a third partytrading system, which orders can optionally be netted before sendingthem to the third party trading system.

[0077] The present invention also permits the collection of securitiesinto prepackaged portfolios that, if acquired by an investor, providethe investor all the advantages described before of directly owning theunderlying securities while having a portfolio that reflects somestrategy or preference determined by some other means. For example, acurrently popular strategy is to invest in the ten of the thirty stockscomprising the Dow Jones Industrial Index that have performed the mostpoorly in the past calendar year. The expectation is that these tenstocks will then outperform the index in the succeeding calendar year.Consequently, currently, investors wishing to follow this strategygenerally purchase an interest in a unit investment trust. Each year thetrust liquidates and an investor wishing to continue the strategy mustpurchase a new interest in a new trust in the next year. These trustsnormally carry maintenance fees and are sold by brokers who charge asignificant load for acquiring the trust unit. Moreover, the unit isdictated by the sponsor. If an investor wanted to buy the nine, insteadof ten, stocks that most under performed, there is currently no goodmechanism for doing so. In addition, the investor owns an interest inthe trust, which has many of the same negative characteristics as afund, described above. Therefore, according to yet another aspect of thecurrent invention, the investor could simply click on a button on thegraphical investor interface and receive a proposed portfolio consistingof a selected grouping of securities like the ten under performingstocks in the Dow Index. The investor could then keep that portfolio assuggested, or modify that portfolio if desired by eliminating one of thestocks (to create the nine aforementioned) or by adding another tocreate eleven, or by modifying the relative weightings of the ten etc.The portfolio would then be acquired for the investor just as if theinvestor selected the securities to be included in that portfoliothrough other means. In addition, the portfolio that is pre-packaged asa starting point for the investor could also be a portfolio recommendedby another, such as an investing magazine's picks for the next fewyears, or an analyst or investment bank's selections, or anorganization's preferences (such as the AFL-CIO's or the BusinessRoundTable's preferences or members), or even a famous person'sselections. In each case the investor obtains the benefits of the systemproviding a portfolio of directly owned securities, as opposed to aninterest in a fund or trust.

[0078] The present invention also provides for the collection ofinformation concerning the plurality of investors of the system of thepresent invention. Investor characteristics are collected and stored onan anonymous basis so that subsequent access to information derived frominvestor statistics and demographics can not be traced to any oneparticular investor. This data collection capability leads to a varietyof novel investment strategies. For example, information might becollected from a number of patent lawyers or economists. An investor ofthe system might then be able to pose a question concerning a particularaffinity group, for example patent attorneys or economists. The investormight then be interested in what securities are being invested in bypatent lawyers or economists.

[0079] Once an affinity group is identified, the system can gatherstatistics for the investor noting, again hypothetically, that as agroup, patent attorneys invest in high technology stocks. The systemcould then list the ten most frequently traded high technology stocks inwhich patent attorneys are interested. Similarly, the system can gatherstatistics for the investor on what level of risk and return generallycharacterizes the current portfolio investing by economists, and thencreate a portfolio that matches those portfolio characteristics.

[0080] If an investor has a particular interest in a more specificaffinity group, the investor might query the system of the presentinvention to provide all of the securities in which patent attorneys whospecialize in mechanical engineering are investing. Again generalgroupings of securities could be presented or the top ten securitiesbeing traded by mechanical patent attorneys can be listed, or theportfolio characteristics can be selected and matched.

[0081] Since a wide variety of information can be obtained by the systemof the present invention, various multivariate analyses can be performedso that a wide variety of affinities can be created. For example, ageneralized profile can be created for all those investors who earn morethan $75,000.00 per year. Alternatively, all those investors who have anengineering background in electrical engineering, regardless of theiractual profession, can be created. A securities listing for all actorswho live in California could also be created.

[0082] Once these affinity group investment characteristics andstrategies are created, an investor can have the option of investing inthe same portfolio (based on risk/return characteristics, identity ofsecurity characteristics, such as high tech, or individual securities orotherwise) as is listed for a particular affinity group. Thus affinitygroup investing can be supported by the system of the present invention.This again provides numerous options for unsophisticated investors, orthose investors who simply wish to take advantage of the thoughtprocesses of a particular group of investors whose characteristics areselected by the investor.

[0083] An additional functionality of the present invention is to assessthe relative performance of the portfolio of each affinity group. Sincethe securities either as groups (e.g., utilities) or individual stocks(e.g., Intel) can be analyzed over various periods of time based uponinformation stored in the securities database of the present inventionsuch information can be provided to the investor. In this manner aninvestor might determine that Hollywood actors are better investors thanpatent attorneys.

[0084] An additional benefit of the present invention is that it allowsfor an investor to modify the investor's portfolio without selling allthe securities held by the investor, but rather by simply modifying theportfolio. Consequently, as compared to an investment in funds where aninvestor may wish to switch from a Fidelity fund to a somewhat morerisky Vanguard fund, where the investor currently has to sell theFidelity fund (with possible tax consequences) to buy the Vanguard fund,under the present invention, the investor merely has to increase therisk level. According to one aspect of the present invention then, aninvestor that wishes to match the risk level (within possible limits) ofa specified fund merely modifies the risk level of the given portfolioto do so. This can be accomplished by leveraging (margining) the currentsecurities positions without having to sell any of the securities.

[0085] According to yet another aspect of the present invention, inorder to permit the investor to understand and manage its portfolio on awhole, integrated basis, the investor would be permitted, for purpose ofanalyses, to aggregate the holdings in multiple accounts (such as anIRA, a 401(k), and a non-tax-advantaged account that the investor usesfor investing). In this manner, the investor can view all its holdingsin securities and other investments as a single integrated investmentportfolio for purposes of determining risk levels, diversification,concentration, sector exposure, or otherwise. Consequently, the investorobtains the benefits of viewing its portfolio as an integrated whole, asopposed to a series of unconnected investments, even though for legalpurposes the accounts are maintained as legally disparate and separateaccounts. According to yet another aspect of the present invention, thesame concepts of aggregating across legally disparate accounts could beemployed in connection with other securities, primarily interests infunds, and even investments other than individual securities or funds,such as real estate, gold or other investments, that an investor mighthold.

[0086] In addition, individuals who wish to invest in securities, or whoshould invest in securities in order to achieve their financial goals,frequently are not sufficiently sophisticated enough to be familiar withthe wide variety of technical terms and their meanings associated withsuch investing. For example the term “volatility” may have littlemeaning to a novice investor. Further, such an investor might havespecific desires for stocks which might be expressed in terms of adesire to invest in “big companies” or “high tech” stocks yet theinvestor may not have a firm foundation for what these terms actuallymean. In order to assist novice investors in taking advantage of thewide variety of capabilities of the present invention, a naturallanguage interface is provided wherein an investor can pose investmentpreferences in terms with which the investor is comfortable. The naturallanguage interface parses the input language of the investor intosecurities characteristics that would meet the investor's needs. Forexample, if the investor desires to invest only in “big companies,” thenatural language interface translates that desire into a query againstannual revenues of companies in the securities database. Further, theterm, “big companies” could then be determined to mean companies whoseannual gross revenue is in excess of $1 billion, for example. This inturn implicates only certain stocks in the generalized portfolio ofsecurities in the system's database. Therefore, as a result of theinvestor's desire to invest in “big companies” a series of stocks wouldbe selected and displayed to the investor which fits into thecharacteristics desired by the investor.

[0087] This natural language interface can be accomplished in severalfashions. For example, keyboard queries now exist in most softwarepackages whereby an investor can pose a question in a natural languagewhich is then interpreted by a natural language interface to retrievetopic suggestions. Additionally, speech processing is now at a pointwhere voice input can be used as direct input to a natural languageinterface. In this fashion, investors who wish to speak their requests,or individuals who are handicapped and have difficulty using a keyboard,can use a speech processor connected to the natural language interfaceof the present invention to input their requests for stocks of aparticular type.

[0088] For those investors who generally want to invest but are totallyunfamiliar with the terminology that characterizes stocks, a series ofscreens may be presented to the investor which gives the investoroptions in a natural language form which the investor can then select asinput to the system for the selection of securities. For example, ascreen may provide the investor with choices which state “I wish toinvest in large companies.” In this example, checking of this particularcharacteristic on a screen results in a series of securitiescharacteristics being triggered in a query against the generalizeddatabase of securities. In this case a natural language processor is notnecessarily required since the “canned” queries can already have therules for securities selection associated with the choice on the screen.

[0089] Thus in this fashion investing in securities is simplified forthose investors who are new to investing or who simply lack thevocabulary to specify the securities such investors' desire.

BRIEF DESCRIPTION OF THE DRAWINGS

[0090]FIG. 1 depicts the process according to the present invention inblock diagram format.

[0091]FIG. 2 depicts a sample investor input questionnaire for use in anasset allocation model.

[0092]FIG. 3 depicts a sample output of an asset allocation model.

[0093]FIG. 4(A) depicts a sample portfolio editor screen according tothe present invention and FIG. 4(B) depicts a sample portfolio selectionscreen with other portfolio starting points.

[0094]FIG. 5 depicts a sample output of the portfolio selection processof the present invention.

[0095]FIG. 6 depicts an overall block diagram of the computer-basedsystem of the present invention.

[0096]FIG. 7 depicts a flow chart of the graphical investor interfacepresented to the investor during the creation or modification of theportfolio according to the computer-based system of the presentinvention.

[0097]FIG. 8 depicts a flow chart of the graphical investor interfacepresented to the investor in connection with the investor employingother features of the system according to the computer-based system ofthe present invention.

[0098] FIGS. 9-12 depict a flow chart of the processing occurring at aWeb server in connection with creating or modifying a small sampleportfolio according to the computer-based system of the presentinvention.

[0099]FIG. 13 depicts certain screens presented to an investor duringvarious steps in the process of creating or modifying a portfolioaccording to the computer-based system of the present invention.

[0100]FIG. 14 depicts a block diagram of an exemplary computer-basedsystem according to the present invention interacting with existingsystems.

[0101]FIG. 15 depicts the natural investor interface as it relates tothe computer-based system according to the present invention.

[0102]FIG. 16 depicts the compilation of affinity and collaborativefiltering techniques used in conjunction with and as they relate to thecomputer-based system according to the present invention.

[0103]FIG. 17 depicts a dial-back security mechanism for transmittingsensitive information to the web site.

DETAILED DESCRIPTION

[0104] As used herein, assets, rights or liabilities refers to anytradeable commodity or item of value in which there exists a market fortrading. This definition includes securities, equities, derivatives,currencies, fungible commodities, insurance contracts, mortgages, bonds,airline reservations, hotel reservations, golf tee times, country clubmemberships, antiques, etc. Although the computer-based system of thepresent invention can be used with regard to any asset or liability thatis traded, the discussion herein relates primarily to its use inconnection with securities for simplicity purposes.

[0105] As used herein, smaller investors includes generally any investorinvesting a smaller amount, regardless of whether an investor is aninstitution or an individual, and regardless of whether the investor isacting on its own behalf or on behalf of another. It would also includean investor investing through a financial planner, for example, whoactually provides the inputs for and access to the system on behalf ofthe investor. The present invention consists of a computer-based systemthat provides smaller investors, a convenient and simple mechanism forinvesting small amounts including on a periodic basis, and a personalcomputer based or accessible program for managing a portfolio ofsecurities, including the ability to make adjustments to the portfolioby selling or purchasing securities to modify the portfolio, formonitoring tax effects, for passing through voting rights of thesecurities and for delegating such rights to third parties at thediscretion of the investor, for limiting parameters of portfolios ifdesired by the investor or another with authority over the account, andfor analyzing investments held by the investor on an integrated,portfolio basis.

[0106] By aggregating orders that are otherwise economically unviable,such as odd lots, fractional shares and small orders, into one largeorder, the present invention creates an economy of scale that permitssmaller investors to create, own and manage a portfolio of securities,i.e., an individual mutual fund-type of investment that is tailored tothe specific preferences of each investor. By aggregating orders intoone order the present invention permits costs to be based on a small feerelative to each economically unviable order, rather than even a smallfee that would otherwise make placing the economically unviable orderimpractical. For example, if an individual or smaller investor can onlyafford to invest $100 per month, and wants to create diversification,each time the investor invests in 30 stocks, he would have to pay, say$5 for each order under existing deep discount brokerages (and thatwould be just the commission charge, not including the all-in-costs fromwide spreads, etc.). Obviously, no one would pay $150 to invest $100. Incontrast, the present invention permits the small investor to invest his$100 per month because the entire order being placed by the systemincurs one fee that is then distributed across the orders pro rata,hence a small order only incurs a small fee. For example, if the entirefee was 2% of the order, then the investor would owe $2 for his $100investment.

[0107] The structure of the system of the present invention also allowsits cost to be based on access to or usage of the system (such as amonthly fee of $5) as opposed to according to securities orders enteredinto the system, as per common brokerage. The result is that theinvestor can cost-effectively create a portfolio of securities comprisedof directly owned individual securities with attributes similar to amutual fund, such as diversification, but with advantages, such as taxadvantages, over a mutual fund.

[0108] The underlying purpose and principal theme embodied in thecomputer-based system of the present invention is that investors shouldbe able to invest in tradeable assets as a portfolio instead of as acollection of individual assets. In other words, as portfolio theoryteaches, the value of an asset to a portfolio is different from thevalue of the asset by itself; the computer-based system of the presentinvention, therefore, permits investors to make investment decisionsbased on the effect on the investor's portfolio, and to create andmaintain a diversified portfolio.

[0109] The computer-based system of the present invention as compared tofunds, among other things, provides:

[0110] 1. Complete control for the investor over what securities can beselected, and in what weights and amounts.

[0111] 2. Control over the tax effects of purchases or sales of thesecurities included in the portfolio, preventing the investor from beingpresented with unwanted taxable gain due to discretionary salestransactions of fund managers.

[0112] 3.All the information necessary to monitor and manage tax effectsand the capability to sell or buy the individual securities in hisportfolio to obtain desired tax benefits.

[0113] 4. All shareholder rights with respect to each security in theportfolio to the investor and full ownership and control over allinvestment, voting and other decisions regarding such securities.

[0114] 5. Direct control over the charges and expenses that will beincurred.

[0115] 6. The possibility of making multiple and intra-day investmentdecisions by the investor, if he wishes.

[0116] 7. Control over all factors in the portfolio and modification ofthem as the investor sees fit.

[0117] Furthermore, compared to existing brokerage services, thecomputer-based system of the present invention:

[0118] 1. (a) Reduces costs because the system aggregates order flow,limits the number of actual trades that need to be made external to thesystem, directs investors to specified securities to further concentratethe order flow, and automates the input process. (Consequently, thesystem's charges to the investors for the creation of a portfolio can befar less—on the order of one to two orders of magnitude less—as comparedto even deep discount or non-discount brokers, respectively.); and (b)Enables an investor to select individual securities reflecting hispreferences to be included within a diversified portfolio by steppingthe investor through all the issues for creating and managing adiversified portfolio and by providing the method and apparatusnecessary to create and manage such a portfolio.

[0119] 2. Enables an investor to acquire fractional and small numbers ofshares, thereby permitting the cost-effective creation and maintenanceof smaller, but diversified, portfolios. As a result, the computer-basedsystem of the present invention permits even a very small investor tocreate and own a diversified portfolio of securities (or any otherassets or liabilities) for any amount, even if all of the shares arefractional amounts!

[0120] The computer-based system of the present invention permits,without incurring any additional costs, investors to purchase or sellsmall—and even fractional—units of shares. This is because, according toone embodiment of the computer-based system of the present invention,the system aggregates orders provided by its investors, executes theaggregated transactions and then allocates the acquired (or cash forsold) shares back to the accounts of the investors. (Since transactionsoutside of the system must still be made in full share amounts, it ispossible that a fractional share amount could remain after theallocations. For example, 7½ shares of a stock in total could beallocated to 15 different accounts—with ½ share allocated to each. Toeffect this transaction, if the shares are acquired from outside thesystem, the broker operating the system would acquire 8 shares. Theremaining ½ share would be owned by the broker or a third party workerwith the broker operating the system and held for allocation as neededin subsequent rounds of trading.) Consequently, an investor could have$150 per week invested in 50 stocks, receiving an allocation to hisaccount of fractional shares. Each subsequent week, the investor wouldhave added to his account additional fractional interests in each ofthese stocks. Over the course of a year with, for example, about $7,800invested, the investor would have full and fractional shares in hisaccount (if the average stock price were $30, the investor would have onaverage a little over 5 shares—5.2 shares to be precise—in each of 50stocks). The system of the present invention permits that fullinvestment each week (or any desired period) in a diversified portfolio,the transactions in small share interests, and the transactions infractional interests (none of which is possible on a cost-effectivebasis with ordinary brokerage). According to another embodiment of thecomputer-based system of the present invention, the system could bemaintained by a broker so that the orders of the investors are executedby the broker or a third party as principal, with the broker maintaininga position in the securities, and thereby, in essence, aggregating theorders of the investors as contra-side transactions of the broker.Periodically, the broker could then execute an off-setting trade in themarket place if the broker did not wish to carry the position.

[0121] 3. Enables an investor to select individual securities reflectingpreferences to be included within a diversified portfolio, and providesthe information and tools necessary to create this type of portfolio fora low cost. The tools can also include “pre-packaged” or “celebrity” orother selected portfolios that can be further modified by the investor,or portfolios reflecting the portfolios or portfolio characteristics ofspecified affinity groups or other selected investors.

[0122] 4. Enables reduced transactions costs by accepting customerorders entered at any time and aggregating them for trading. Thecomputer-based system of the present invention holds the orders (exceptfor those for which immediate execution is desired by the customer)until particular times, such as for example, at least three times perday (the “open” for any orders received since the last close ofbusiness, “mid-day” for all orders received during the morning, and the“close” for all orders received during the afternoon). The number oftimes orders could be traded is in general not limited, and depends tosome extent on the number of investors, and the degree of risk orprincipal positioning that the broker wishes to accept. Thecomputer-based system of the present invention takes all the orders thathave been entered with it and, at the specified time, aggregates thoseorders for the purpose of reducing the number of transactions that wouldhave to be executed, thereby reducing transaction costs and providingbenefits to investors.

[0123] 5. Enables superior trade execution of orders through netting.Furthermore, the computer-based system of the present invention includesthe capability of netting orders against each other. The remainingorders that cannot be matched are executed internally (to the extent thesystem is making a market in the securities being traded) or forwardedfor execution to a third party execution system (such as an exchange ora market maker).

[0124] 6. Monitors portfolio based tax effects. In contrast to the priorart, the underlying concept of the computer-based system of the presentinvention relates to the creation of a portfolio. In that context, themonitoring of the portfolio for tax effects is an adjunct to thetransaction history and portfolio monitoring is part of the system.Consequently, the computer-based system of the present invention cantrack the basis and acquisition date in each of the securities in theportfolio and use that basis to determine the tax consequences for theindividual securities and the portfolio as a whole at any point in time.

[0125] 7. Assists in the exercise of shareholder rights. Because thecomputer-based system of the present invention is designed to assistwith regard to portfolios, including the exercise of shareholder rightsregarding the portfolio securities, the computer-based system of thepresent invention offers assistance to investors in the form ofaggregating not only their order execution, but also their voting orother rights. Consequently, an investor can obtain information inconnection with his portfolio as to how securities could be voted by aservice that analyzes the securities in the portfolio. The investor ispermitted to direct that the voting be delegated to such service (orother services if multiple services are made available).

[0126] 8. Permits the establishment of portfolio parameters. Because thecomputer-based system of the present invention is designed to assist inthe creation of portfolios comprised of individual securities as opposedto the acquisition of individual securities as such, the portfolios canhave limits imposed on them to facilitate “informed” or “reasonable”investing as determined by a plan sponsor or other party. Suchparameters can be such that the portfolio must be diversified and nottoo risky, for example (in other words, it must have a set minimumnumber of stocks, such as 30, satisfying certain criteria, with no onestock accounting for more than 5% of the portfolio's value, and theoverall risk in the portfolio not being in excess of a specified amount,such as 110%, of the S&P 500 risk level).

[0127] System Overview

[0128] A block diagram of the process flow according to an exemplaryembodiment of the computer-based system of the present invention isdepicted in FIG. 1. The system 10 includes an asset allocation model 1,a portfolio selection editor 2, a web server 3 with storage 4, adatabase of tradeable assets or liabilities 6, a third party tradingsystem 5 coupled to a clearinghouse 8, and a third party payment system7. Information is provided by the investor to the computer-based system10 through a graphical investor interface, which is shown in FIG. 1 intwo parts as the asset allocation model 1 and the portfolio selectioneditor 2.

[0129] In the asset allocation model 1, an investor is first queried foranswers to a series of questions that determine investor data (e.g.,name, address, payment information, etc.), the investor's risk toleranceand financial goals and objectives, the investor's current assets andliabilities, the investor's current and expected income and current andexpected expenditures and time frames (e.g., college education forchildren within 10-15 years, care of a parent within 5-10 years), theinvestor's preferred risk-return characteristics, the investor'spreferences for various types of securities and preferred portfolio mix,and various other items. There are a variety of different outputs forthe asset allocation model. One formulation is an amount that theinvestor should invest in long-term investments, medium-terminvestments, and short-term investments. The asset allocation modeldetermines a percentage allocation in each of the general investmenttypes according to a set of known tables. There are many existing assetallocation models, any of which can be employed in the presentinvention, such as that provided by Quicken™, Mentun Investment™ fromThe Mentum Corporation and perhaps Financial Engines(www.financialengines.com).

[0130] An exemplary questionnaire used for input to any of the aboveasset allocation models is depicted in FIG. 2. FIG. 3 depicts anexemplary output of such an asset allocation model.

[0131] The investor can enter the system at various stages, however, andneed not answer all the questions. For example, the investor could startat the beginning, presenting all the basic information about age,income, liabilities, financial goals, etc. In that instance, thecomputer-based system of the present invention utilizes any of the knownand publicly available asset allocation models, or a combination of suchmodels, to provide information to the investor as to the percentage ofinvestable assets that should be allocated, generally, to short-termliquid investments (such as a money market fund, or short-termgovernment or investment grade bonds), medium term investments such asmedium term bonds, and long-term investments (such as equities, privateplacements or the like).

[0132] Once this percentage allocation is generally determined, thesystem enables the investor, as described below, to select a portfolioof tradeable assets or liabilities. This selection involves providingamong other things an indication of the historical levels of risk andreturns of the tradeable assets or liabilities to the investor as aportfolio of investments.

[0133] Once the investor selects his desired portfolio based on hisvarious preferences as to specific assets or liabilities to be includedin the portfolio, that portfolio may include different historical andexpected levels of return than necessary to achieve the investor'sstated financial goals. Consequently, the present invention provides anindication to the investor that these selections now require amodification of either the investor's specific asset/liabilitypreferences or the percentage allocation to reach his investmentobjectives. The system does this by comparing the historical andexpected rates of returns of the investor's portfolio to the rates ofreturn assumed in the asset allocation models using known probabilisticmethods including value at risk and sensitivity analysis, and whendetermining a difference exists, suggesting an adjustment in thepercentage allocation to correct for the difference so that the desiredfinancial goals can be achieved within the constraints set by theinvestor. To the extent these goals cannot be achieved, the presentinvention informs the investor that the risk return levels are notsufficient to reach the established goals. Moreover, the system providesfurther information to the investor as to what returns and levels ofinvestment would be necessary to satisfy various financial goalsmodified to take into account the investor's risk preferences asprovided to the system.

[0134] In addition, the asset allocation model to be used utilizesprobabilistic estimates of the likelihood of meeting those goals givenvarious asset allocations. In the case where the investor steps throughthis series of inquiries in the asset allocation model—which, as noted,is optional—the investor is presented with an output that is then usedas an input to the next stage: namely, building the specific portfolio.

[0135] One unique feature of the present invention is shown by thedistinction to the normal use of an asset allocation model, even oneutilizing probabilistic returns such as Financial Engines. Under thepresent invention, the amount to be allocated to various asset classesis informed and is dynamically adjusted by the investor'spreferences—not just the investor's demographic andasset/liability/income/expenditure information. By way of example, taketwo investor's who are identical in every respect regarding their assetsand income and expected income from their jobs, their liabilities andexpected expenditures, and financial goals for retirement, etc., exceptfor their risk tolerance and preferences. One investor is very riskadverse, the other very willing to take risks. The usual assetallocation models would prescribe identical allocations to each. Addingprobabilistic determinations as to the performance of various assetclasses or various assets, such as mutual funds, simply allows a finertuning and more accurate use of the asset allocation model. In otherwords, it simply ensures that when the determination is made to investin a fund that returns an equity level investment, that the fund soinvested in actually is expected to provide that return. It would stillgenerate identical results for the general asset allocation or specificasset allocation, because it uses the information as to the investor'sgoals—and the asset's probabilistic returns—to arrive at a model of whatasset is needed to satisfy the investor's goals. It does not use theinvestor's own risk tolerance in a dynamic manner to adjust the assetallocation model. But if, for example, some significant allocation inequities is necessary to reach the specified financial goals, and theinvestor who is very risk adverse is unwilling or reluctant to invest inequities that have ordinary market risk, it will be important to adjustthe allocation and the actual equity portfolio in which the investmentswill be made. In other words, while the non-risk adverse investor mayhave, as an example, one-sixth of his investable assets in money marketor short-term instruments, one-third in high risk equities, and one-halfin intermediate risk instruments, it may be necessary for therisk-adverse investor to, contrary to expectations, have a portfoliothat has more equities—but ones with lower risk—to satisfy both hisfinancial goals and his perception of risk. Thus, the system of thepresent invention provides the asset allocation model with additionalrisk preference information that can be acted upon precisely throughspecific security portfolio allocation, as opposed to the typical assetallocation model that simply provides for an allocation to “equities” orto “funds” and then finds the equities or funds that satisfy the averageas determined by the model, without being able to distinguish between—orcreate and act on—specific portfolios of equities that will be optimalfor the investor taking into account, on a dynamic basis, the actualrisk preferences, as opposed to only the financial goals and relatedfactors, of the investor.

[0136] Notwithstanding this potential benefit, an investor couldcompletely skip that portion of the interface involved in the assetallocation determination, and move directly to creating a portfolio,such as by stating that the investor wishes to invest in equities andwould like to create a portfolio based on stated preferences. In thiscase, the investor enters those preferences just as an investor startingwith the asset allocation determination would have entered thesepreferences, but without seeking the allocation, or the investor canselect from a number of other portfolio creating starting points, suchas pre-packaged portfolios, celebrity portfolios, affinity groupportfolios, or portfolios suggested or recommended by the system basedon the investor's risk and return preferences as generally stated by theinvestor. The portfolio screens enable selection of securities based ontype of business or industry, stock volatility, capitalization,inclusion in various indices, book-to-earnings ratio or other financialmeasures, corporate governance or other matters, etc. The otherportfolio creation starting points would consist of portfolios such asvarious indices (or subsets of various indices that generally reflectthe risk—return characteristics of the indices), various strategies,such as the ten stocks in the Dow Jones Industrial Index thatunderperformed during the last calendar year, or other strategiesembodied in various unit investment trusts, celebrity portfoliosreflecting the portfolios of famous people or analysts or others, orportfolios encompassing recommendations from investing magazines ornewsletters or other sources, or portfolios reflecting screenedrisk—return characteristics from various affinity groups that can becreated by the investor, such as the portfolio characteristics ofmanagers with more than $200,000 income, securities lawyers living inWashington, D.C., engineers in Silicon Valley, commercial bank officersor other groups (all aggregated and with permission to protect privacy).An exemplary screen for inputting criteria for selecting the securitiesin the portfolio is depicted in FIGS. 4(A) and 4(B).

[0137]FIG. 5 depicts an exemplary output of the selection, in which eachof the forty securities are equally weighted in the portfolio in termsof dollars invested in each security, which such exemplary portfoliocould have been obtained through the investor's screening of stocks aspart of the screening selection criteria based on book value, etc.pre-packaged portfolios, etc. affinity portfolios, etc. all as modifiedby the investor. Other variations are possible, and they can depend uponthe price of the underlying security, and the total numbers ofsecurities available, and the combined risk factor desired for theentire portfolio.

[0138] To accomplish this selection, the portfolio editor 2 accesses theweb server 3, which in turn accesses the database 6 of equities, bonds,etc. This database is constantly updated with pricing, capitalization,price to earnings ratio, etc. from various stock reporting servicesknown in the art. Each relevant factor of a security is associated withthat security. When the investor establishes criteria for his portfolio,each of the relevant factors for each security in the database iscompared to the criteria, and if they match the security is eitherincluded or excluded from the portfolio depending on the particularcriterion.

[0139] As an example, an investor might have stated that he wished toinvest solely in large capitalization, software, financial services andentertainment companies based in the United States with no negativecorporate governance factors. The system then returns a listing ofstocks, including obvious ones that are household names and some thatare not. The system then specifies percentages of each stock to allocateto the portfolio in order to insure a reasonable level ofdiversification (and would alert the investor if that could not bedone). One example would be dividing the total dollar amount beinginvested by the number of securities meeting the criteria entered by theinvestor and allocating an equal dollar amount or acapitalization-weighted dollar amount to each of the securities, and ifthere were fewer than twenty securities for example, indicating to theinvestor that reasonable levels of diversification were not necessarilyachieved. It should be noted that other levels of diversification couldbe used as well.

[0140] In addition, the system specifies the level of risk for theportfolio and suggests changes to satisfy the investor's preferences. Asan example, if there were insufficient companies in the above list, thesystem would suggest either relaxing the capitalization standard, orincluding more industries, such as communications, which could be viewedas similar to the non-manufacturing industries selected by the investor.

[0141] In conjunction with certain of these screens, the investor isprovided with a response that shows the investor, graphically and/orwith text and/or number representations, the results of the investor'sselections. An exemplary portfolio is depicted in FIG. 5. The resultsinclude a comparison of the historical inherent risk in the selectedportfolio relative to known standards, such as the S&P 500, and theriskiness from the perspective of lost principal, etc. of the portfoliofor specified periods or through specified formulas.

[0142] The investor next specifies the dollar amount to be invested inthis portfolio. The investor's order is then aggregated with the ordersof other investors (or the broker becomes the aggregator by executingthe order and taking a position in the stocks). To purchase the definedportfolio, the investor must have assets on hand or credit to acquirethe securities, which can be obtained through any of various mechanisms,such as a direct deposit to the system, through a check or electronicfunds transfer (EFT) to the broker operating the system, by arrangingcredit to be extended (including on a temporary basis while the order isbeing settled), or by having cash or other securities to be sold on handfrom previous transactions, etc. Those systems that involve thirdparties are depicted in the figures as the third party payment system 7.One of the options offered by the system is a money market fund forexcess cash, as well as a linked debit card, credit card, check writingfacility to reach funds in the investor's account and other ordinary andknown cash management services.

[0143] The system electronically executes the needed transaction at thenext transaction window (which could be set at the discretion of thesystem operator (the broker or bank running the system), such as when acertain market exposure such as when $10,000 or more of a long positionin a security or aggregation of securities in portfolios is reached, orat set times such as three times a day) to create the specifiedportfolio for the investor. This transaction is performed in two steps.First, the orders of all investors are aggregated within the system 10(with the system operator potentially pre-aggregating some orders asprincipal, such as by executing against itself all orders of less than$1000 and then aggregating these orders as one larger order that itexecutes for itself) and then netted against each other, again withinthe system 10, to the extent consistent with then applicableregulations. Then, if the system is not part of a broker making a marketin the securities, the excess trades are electronically sent to a thirdparty trading system, such as the OptiMark™ trading system. If thesystem is part of such a broker making a market in the securities, thenthe broker executes the excess trades directly. This portfolio creationand execution, with aggregation in connection with the transactions (intransaction windows with or without the broker engaging in somepre-aggregation) and with or without netting, of customized orders ofindividual securities for smaller investors—the ability actually toeffect the transaction and create and manage the portfolio ofsecurities—allows investors to obtain advantages over ordinary brokerageand over selecting and investing in mutual funds, and over those systemsthat purport to monitor portfolios, either of securities or of funds.

[0144] The computer-based system of the present invention includes thecapability to allocate suggested holdings to the investor to create adiversified portfolio (which likely will include fractional shareinterests in stocks). The portfolio created by the computer-based systemof the present invention provides the investor the benefits of modemportfolio management theory and does so in the context of a system thatallows for the creation and maintenance of the portfolio for a cost thatis reasonable in light of the portfolio's size.

[0145] Additional funds can be added to purchase additional stocks, oramounts of existing stocks, in the portfolio, with such funds beingadded automatically out of direct deposits of paychecks, for example, orsales of part or all of the portfolio can be effected, numerous times aday. If the investor wishes to add or sell specified stocks, for examplefor tax purposes where the investor wishes to obtain a taxable loss, thesystem informs the investor of the effects of the change on theportfolio's diversification and risk levels, etc. But (unless there issome restriction imposed by an employer for example) the investor hascomplete control and can determine to create a completelynon-diversified portfolio comprising only one or a few stocks, ifdesired, by selecting to have the system acquire, or the portfolioconsist exclusively after sales of, only those stocks. Additionally, anyof the preferences specified by the investor can be adjusted and madeeffective numerous times a day. If the investor changes his preferences,the system will review the investor's current holdings and suggestchanges to reflect the new preferences, including any changes in, or tomaintain, desired risk/return levels. Similarly, as the actualexperience of the securities in the portfolio changes (and obviously inthe case of a company, for example, that is acquired and its securitiesare replaced with cash), the system may suggest changes even if theinvestor's preferences have not changed.

[0146] The system can be accessed by the investor from a main frame orserver at a distant location with the investor utilizing a directdial-up connection or Internet access, through an intermediary such as abank or broker, or the invention can be embodied in part on theinvestor's computer with the investor linking to the distant sitethrough any of these access means to obtain specific information andprovide information needed to execute trades. In other words, much ofthe processing can be completed “off-line” with the connection to theserver being required only to obtain updated data or to send an orderfor a portfolio modification, or completely “on-line” depending on howmuch of the present invention is made resident on the investor'scomputer.

[0147] Overall System

[0148]FIG. 6 depicts an exemplary block diagram of the computer-basedsystem of the present invention. It depicts an investor's computer 11 aconnected to a communication network 12, such as the Internet, which isthen connected to a web server 14 that stores the main program forcontrolling trading and investor access. In this diagram, there are twoother investors' computers 11 b, 11 c also connected to the web server14 through the Internet 12. In addition, there is shown an investor'scomputer 11 d connected to the web server 14 directly through a dial-upconnection. Finally, there is shown an investor's computer 11 econnected to the web server 14 through an intermediary 13, such as abank or brokerage or financial planner, that is providing the system asa service for their customers, which is then connected either directlyor through the Internet 12 to such web server 14.

[0149] The web server 14 is also electronically connected to otherinvestors and traders 15 for executing trades to be made outside of thecomputer-based system of the present invention through any of a varietyof known standard interfaces, e.g., the Financial Information eXchange(FIX) protocol. Some or almost all of the program that performs themethod of the present invention can be left resident on the investor'scomputer 11 a-11 e, with the investor accessing the Server 14 to obtainupdated information and to provide orders for execution.

[0150] Graphical User Interface Program Flow

[0151]FIG. 7 depicts one possible flow chart of the graphical userinterface presented to the investor during the creation or modificationof the investor's portfolio.

[0152] Screen 1 (22) elicits investor identification information topermit log-on (e.g., investor name, password and certain otherinformation for security purposes). Investors will be permitted a numberof secure mechanisms to provide credit card and other information to thesystem. Under one embodiment, however, (FIG. 17) an investor 171accessing the system 173 over the Internet 172 for the first time willbe provided a password and log-on identification without having toprovide any confidential information, such as credit card information,to the processing site. The site will then call the investor back 174 ata number supplied by the investor, or the investor can access the sitethrough a direct telephone call. The investor can then supply theprocessing site with the necessary information by touch-tone input ofthe site assigned password and the investor's confidential credit cardinformation 175. Once the site has the credit card information throughdirect telephone connection, it need not be provided to the site againand the investor then uses the investor-site-specific password andlog-on identification for communications. Those passwords and log-onswill be useless for any purpose other than communication with the site,and the credit card information never travels on the Internet.

[0153] Once the investor enters the appropriate information, the programflow moves to screen 2 (23).

[0154] Screen 2 (23) provides instructions for new investors for theirfirst time through the system. For existing investors the screens aresomewhat different, but the general flow is the same. The informationprovided includes a series of educational facts, links to other sites(such as for academic journals or books on investing or studies postedto the site or other services including e-mail, etc.). Investors canbypass this screen by selecting a switch to prevent the program fromstopping on this screen during future executions of the program. In anycase, program flow then proceeds to screen 3 (24).

[0155] Screen 3 (24) provides a listing of options for the investor(e.g., create a new account, provide preferences, modify existingportfolio preferences, purchase or sell a specific security, providewire transfer or other instructions, engage in tax review or planning,monitor price changes in the portfolio, establish weekly dollarcontributions to the portfolio for “dollar averaging” or otherpurposes). The investor is also provided the option to navigate throughthe site and skip over subsequent screens if the investor wishes (aswould be expected of experienced investors seeking to modify or simplyreview an existing portfolio). Program flow then proceeds to screen 4(25).

[0156] Screen 4 (25) elicits from the investor information (see FIG. 2)to create an asset allocation model for the investor (again, only if theinvestor wishes, some investors may skip this). Generally, an assetallocation model helps an investor determine present investmentallocations based on current assets and liabilities, current income,future needs and other factors such as age. In general, the modeldetermines how much should be invested in equities, bonds and cash toreach the goals of the investor in the time remaining. There are manypublicly available asset allocation models. For example, Quicken™includes one as part of certain financial planning software. The WallStreet Journal has provided one as part of certain subscription offers.Either of these or others can be used to create the asset allocationmodel based on the investor input.

[0157] If the investor already has entered this information (e.g., theinvestor already has an account in the system), the existing informationis then displayed. This screen also elicits information that is used toobtain basic information involving the investor's use of the system,such as suitability for certain types of investments and to ensurecompliance with various legal requirements, including determiningwhether the investor qualifies as an “accredited investor” or a“qualified investor” under various federal and state laws. To be anaccredited investor or a qualified investor an investor must satisfycertain criteria. Once the investor has entered this information, thesystem then verifies this information in the normal manner.

[0158] Screen 4 (25) also elicits information from the investor that isemployed in creating a risk-return preference function for the investor.Such information includes volatility levels, risk, required rate ofreturns (based on the above asset allocation model), etc. Theutilization of various parameters to establish that function is thenemployed to set initial defaults, which can be modified if desired bythe investor in Screen 5 (26). Program flow then proceeds to screen 5(26).

[0159] Screen 5 (26) provides for the new investor, or for an existinginvestor who wishes to modify a portfolio to change preferences, ascreen that provides a menu of preferences to set (see FIG. 4 for anexample). The menu includes listings for preferences that relate to,among other things (and to be modified over time as investor choicedictates): type of security by market capitalization, book-to-market,price-earnings ratio, price of stock, geographic sector, product sector,dividend payout, historic price to current price, earnings growth aridsimilar economic factors, and non economic factors such as specificbusiness lines (for example, tobacco, managed health care or defensethat may be viewed as of interest or controversial), engaging inbusiness in particular countries (such as Burma or China or NorthernIreland and ratings from third party sources as to how the selectedcompanies have performed in those countries), executive compensation andother corporate governance factors that are rated by third parties, etc.Depending on which factors the investor selects in this screen as beingof interest, the investor is then presented with other choices through,for example, drop down menus or supplemental screens that review thespecifics of the selections and solicit additional choices. For example,if the investor selects market capitalization as a factor in theselection of stocks for the portfolio, a drop down menu allows theinvestor to select a variety of capitalizations (e.g., eight rangescould be presented, such as a market value of less than $25 million, $25to 100 million, $100 to 500 million, $500 million to $1 billion, $1 to2.5 billion, $2.5 to 5 billion, $5 billion to 10 billion, or over $10billion) which could be selected by pointing a mouse and clicking. Ifthe investor wished to obtain more information, such as a sample ofcompanies within each range, then the investor would select “moreinformation” or a similar box. The investor is then presented with ascreen that provides the additional detail that was requested.

[0160] When finished with that drop down box or screen, the investorthen returns to the initial or other screens that are part of Screen 5(26) and repeats the procedure setting the parameters for any otherfactors for which the investor has preferences.

[0161] Referring to FIG. 4B, alternatively, or additionally, thecomputer-based system of the present invention also allows the investorto be presented with suggested portfolios created through othermeans—such as a recommended portfolio that reflects a specifiedstrategy, such as the ten under performing stocks from the Dow JonesIndustrial Index, or from a selected analyst, or from a magazine orother publication, or from a selected organization or throughcollaborative techniques. As shown in FIG. 4B, the investor can selectfrom a category of portfolios 71-76, under each of which the investorcan then select a particular type of portfolio within that category. Forexample, the investor can select an average portfolio for people withthe same number of children as the investor by selecting “SimilarDemographics” 74 and then “Number of Children” 77.

[0162] As further examples, a noted analyst may state that her idealportfolio would be the following fifty stocks in the followingproportions, or a magazine may give its picks for the “ideal” portfolio,or a charitable organization may provide a list of the corporations thathave done the most for the charity, and individual donors to the charitymay wish to build a portfolio of corporate contributors, or a union maywish to provide a list of companies it works with who it believes aregood companies and may recommend that members acquire shares in thosecompanies. In any of these types of cases, Screen 5 would make availablethe list of companies and the suggested allocations (or if no allocationis provided by the entity creating the list, then in accordance withappropriate diversification requirements, risk and other preferences ofthe investor, as provided previously). Furthermore, the computer-basedsystem of the present invention automatically employs knowncollaborative filtering techniques, such as those utilized through aFirefly Network system (www.firefly.net) because the system already hasthe investor's preferences entered into the system. In this instance,the investor's preferences entered into the system are used to identifysecurities that may be of interest to the investor that have beenspecifically identified and transacted by others with similarpreferences. Entire portfolios can be presented. For example, if aninvestor who enters preferences regarding certain types of stocks thenseparately determines to buy another specified stock, then if anotherinvestor enters similar preferences as the first investor, that secondinvestor could be notified that an investor with similar preferencesalso specifically added for purchase this other security and the secondinvestor may wish to consider adding it as well. In this manner, thesystem of the present invention can be used to facilitate the creationof diversified portfolios created by the equivalent of investment clubs.

[0163] In any of these pre-packaged, analyst, group or collaborativerecommendations, the investor is able to select the entire portfolio asdefined, and specify the dollar amount to be invested as per Screen 8(29) (or if the investor has more securities to include then theinvestor would continue through with the program flow, or the investorcould subtract specified securities from the suggested portfolio, suchas by removing any tobacco stocks from the portfolio, or by changing theweighting of the securities in the portfolio as described in the programflow Screen 7(28) below). Consequently, one of the investor'spreferences and a screen available to the investor is a selection ofsuggested portfolios that represent pre-packaged portfolio strategies,or are recommended by particular analysts, groups or others. Programflow then proceeds to screen 6 (27).

[0164] In each case, and in each of these screens, the investor ispresented with a default set of preferences that the system recommendsbased on the investor's stated general goals and the investorinformation entered in earlier screens. For example, if an investorspecified that he wished very little risk in his portfolio, and highdividend payout, but then selected capitalization exclusively under $25million, the system alerts the investor to the fact that there areinsufficient companies that satisfy these preferences to create areasonably diversified portfolio. The system then recommends that theinvestor permit the system to'select from any size capitalization orsuggest the investor change some of the other parameters that areconstraining the choices, such as the dividend payout.

[0165] For those factors or parameters for which the investor wishes notto make a selection, the system uses defaults to create a portfolio thatsatisfies the other criteria, if any, that are selected by the investor.If no factors or parameters are selected at all, then the system createsa default portfolio based on the asset allocation, risk-returnpreference and other information, such as age and income, that theinvestor has provided the system. The number of different portfoliosthat the system can create is extremely large (almost limitless and inany event far in excess of the number of potential investors), and thereis no expectation that any two investors would have identical portfolios(although they could if they so requested (such as members of a familythat wish to have separate accounts but identical portfolios, or anindividual that wishes to have multiple accounts (such as an IRA and anon-IRA account) with identical portfolios), or if two persons happenedto make identical selections on all parameters, or used defaults in allcases with identical age and income ranges, etc.). Essentially, thesystem engages in an interactive process with the investor via the mainserver and the investor program executing on the investor's computer.The investor's program prompts the investor for the information neededby the main server to determine the portfolio or to create the assetallocation model. However, some of these selections made by the investorcan affect the asset allocation model, such as limiting the volatility,which can cause the program to indicate that the investor must increasethe allocation of resources to equities to achieve the desiredinvestment goals. Consequently, the process can be viewed as either atwo stage process, the first stage of which determines the assetallocation model, and the second stage of which enables the investor toselect the desired securities in his portfolio, or as a singleinteractive process during which the investor selects both the generalcategories of investment vehicles and states his investment goals, whichare often interrelated. If there are limits imposed (by a plan sponsoror employer perhaps, or by the investor itself for its own account orfor another account over which the investor has authority (which couldalso be a corporate account or some other account where parameters areset by one entity and the actual trading or execution selection is madeby another)), the limits would be made apparent in these screens and theinvestor directed to make choices that comply with the limits.

[0166] Screen 6 (27) then presents the investor with his choices andselections and seeks confirmation of the choices. If the investor wishesto modify any of the choices, the investor is then returned to theappropriate prior screen (such as Screen 4 (25) or screen 5 (26)depending on the parameter to be modified). If the investor confirms thechoices, he moves to Screen 7 (28) which displays the portfolio. Programflow then proceeds to screen 7 (28).

[0167] Screen 7 (28) provides the investor with the selected portfolio(see FIG. 5 for an example). The portfolio can be presented in a numberof different formats for the investor. Those formats include: a list ofthe actual stocks to be included, the relative percentages (see caveatbelow) each such stock comprises (by expected dollar allocation) in theportfolio and the risk, relative to the average, of each such stock (seebelow); by type of security selected (such as the percentage that are inone range of market capitalization as opposed to another) and variousother factors that reflect generally the factors that can be selected bythe investor; and, by risk and performance of the portfolio as a whole.

[0168] Both risk and performance are based on the historical activity ofthe stocks and are presented graphically, with portfolios that areriskier than specified averages shown as such by volatility charts, andby words such as “this portfolio, on a historical basis, would lose orgain 10% of its value relative to the [specified] index 5 out of 100trading days.” The portfolio could also be displayed as expected valuesin dollar amounts based on historical returns and volatilities, withprobabilities and sensitivity analyses being performed. The output couldbe a graph showing the expected distribution of the values (much like abell shaped curve showing the average expected value and the tailsshowing the high and low expected values at specified levels oflikelihood (or some particular numbers such as “this portfolio would beexpected to double in value over ten years but there is also a fivepercent chance that it will be worth only 60% or less of its currentvalue in ten years.”

[0169] When the portfolio is displayed as a list of securities to beincluded in the portfolio, the risk for each such security would beshown graphically, such as by a color or a bar next to the stock. As anexample, the bar would be shaded one color (such as yellow) for stocksriskier than the average and another color (such as blue) for those lessrisky than the average (see FIG. 13 for an example), or the bars wouldextend to the right of each listed stock for those stocks that are lessrisky and to the left for those that are more risky. The longer the bar,the further it departs from the average. An investor wishing then toincrease the level of riskiness in the portfolio can either return tothe screen where risk levels are set with the result that the portfoliowill be readjusted to be riskier, or select those stocks that contributeto higher levels of risk and increase the allocation to such stock, oradd to the level of risk by specifying that margin should be used (inother words, that the investor will request a loan from the intermediaryrunning the system or another source to acquire securities on aleveraged basis), thereby increasing the risk level of the portfolio. Inaddition, if the investor wished to make the portfolio similar in risklevels to some other portfolio, such as a fund that the investor wasaccustomed to investing in, or wished to make the portfolio more or lessrisky than that fund or some other portfolio, the investor would begiven the opportunity to specify the precise risk level desired byinputting the desired risk level into the system, either by changing theposition of the pointer on a dial, or another device described hereinfor specifying the overall risk level of the portfolio.

[0170] More generally, at this point, the investor can manually adjustthe portfolio in whatever manner he sees fit by increasing or decreasingthe selection of a particular stock, or by adding a stock that is nototherwise included in the portfolio and specifying the percentage to beallocated to that stock.

[0171] The investor is also provided the opportunity to specify whethersome or all stocks should not be purchased if the price moves materiallybeyond the current price at the time of execution (if the systemoperator is not executing the order immediately and assuming the pricemovement risk as a pre-aggregator). Program flow then proceeds to screen8 (29).

[0172] Screen 8 (29) provides the investor with final confirmation ofthe portfolio, and solicits from the investor the amount to be investedin this portfolio. The investor enters that information as a dollaramount. Because the precise prices at which the specific stocks are tobe purchased will not be known until the time of purchase (if the systemoperator is not executing the order immediately and assuming the pricemovement risk as a pre-aggregator), the number of shares of anyparticular stock to be allocated to a particular portfolio needs to besomewhat approximate to accommodate price swings prior to the executionof the trade. With that caveat, the portfolio allocations and thespecific securities to be purchased are then stored either in thestorage facility on the investor's computer and when transferred to themain server stored there as well, or stored just in one location. Theprecise number of shares to be purchased and allocated to this investorare determined at the next transaction window based on the then currentprices for the stocks as they are purchased for the account of thatinvestor. The portfolio is then updated and stored by the system foraccess the next time the investor logs onto the system.

[0173]FIG. 8 depicts one possible flow chart of the graphical investorinterface presented to the investor in connection with the investoremploying other features of the system.

[0174] Screens 1, 2 and 3 (32 a, 32 b, 32 c) are the same as in FIG. 7,except that a menu is presented as soon as the investor logs on thatpermits him to skip directly to alternate screens without having tosequence through Screens 2 (32 b) and 3 (32 c). In other words, thechoices in Screen 3 (32 c) are presented as a “toolbar” upon log-on thatthe investor can directly access in order to move to any of the otherscreens in the system. After screens 2 (32 a-32 c), program flow thenproceeds to screen 4 (33).

[0175] Screen 4 (33)—the first screen an investor sees after the log-on,assuming the investor selected alternatives from the “Screen3-equivalent-toolbar” other than “create or modify a portfolio”—providesa menu of alternative services. Those services are varied, and depend tosome degree on the investor. For example, offerings of securitiespursuant to private placements can be made legally only to “accreditedinvestors.” Consequently, the system identifies those investors who areaccredited investors and provides to them a menu item for reviewingprivate placement opportunities. Conversely, the system does not providesuch a menu item to non-accredited investors who, under current law,cannot receive such offerings. Program flow then proceeds to screen 5(34).

[0176] Screen 5 (34) is the operational screen for the services selectedby the investor. If, for example, the investor wishes to evaluate theportfolio for tax effects, this Screen 5 (34) permits him to do so. Theinvestor would specify in the tax effects communications menu therelevant parameters selecting from those available—such as stocks withlosses, stocks with gains, long-term versus short-term gain or loss,combinations of the parameters, or all current tax positions. The systemwould then display for the investor the stock positions that satisfy theinvestor's parameters, with dollar amounts listed. Because of the waythe system works—allowing for frequent additions of dollar amounts tothe portfolio for strategies such as dollar cost averaging, and forfrequent adjustments to the portfolio securities themselves, it ispossible that an investor would have gains and losses in the same stock(for example, if the investor had bought 10 shares of a stock at $20 andten shares of the same stock at $30 and the stock is now trading at $25,the investor would have gains and losses in the stock when eachtransaction is viewed separately). In that instance, the system woulddisplay the stock as having both such gains and losses. The investorwould then be presented with a series of options as to what he wouldlike to do next. These options are smart options and context sensitiveso that, for example, an investor is able to sell individual securitiessimply by highlighting those securities in the list and clicking acommand something like “sell at next portfolio adjustment.” Thetransaction is then added to the portfolio as an adjustment and executedat the next transaction window. If the investor wished to sellimmediately, the investor would highlight the securities and click “sellimmediately” (for which it is contemplated that an extra charge would belevied). In either case a confirmation window either pops-up confirmingthe investor's choice at that time, or the confirmation is deferred tothe end (at the investor's option) when the investor confirms allrequested actions.

[0177] The computer-based system of the present invention also providestax preparation as it relates to transactions occurring through theinvention. Specifically, as is necessary to provide the gain and lossinformation as described above, the computer-based system of the presentinvention tracks the tax basis information (including acquisition date)of securities purchased through the system and the sales price for suchsecurities as well as any costs involved in maintaining the portfolio.Consequently, the system executing the computer-based system of thepresent invention provides investors with a complete downloadable Form1040 Schedule D as it relates to transactions in the system. ThatSchedule could then be supplemented with any other capital transactionsthe investor may have. Similarly, the system could provide for one-stepexporting of this Schedule D type information to popular tax preparationpackages, such as Turbo Tax™, for example. This downloading andexporting enables an investor to use the system with a low level ofinconvenience.

[0178] If the investor had selected in Screen 4 (33) another service,such as reviewing private placements if the investor is an accreditedinvestor, or reviewing public offerings, or buying or selling specificsecurities outside of the portfolio, or buying or selling other itemsthat would be offered including, for example, other financial servicessuch as insurance or commodities or futures if permitted by applicablelaw, or non-financial services such as books or software relating toinvestments, or if the investor wished to engage in chat room activitiesor discuss selected companies for which the system would hostconversations with the executives of such companies, etc., the investorwould enter any of those other services through this Screen 5 (34).

[0179] If the investor permits, the system can also rely on theinformation provided by the investor to present the investor with otherpossibilities of interest, along the lines described above, in a moreproactive manner. For example, if the investor is an accredited investorand specifies an interest in private placements involving Internet-basedpublishing companies, the system will specifically alert the investor,when she next logs-on, to the existence of such an offering, and providea means for the investor to obtain the necessary information toparticipate.

[0180] The investor is in a position to move between the operationalscreens, and engage in a variety of activities as mentioned. Programflow then proceeds to screen 6 (35).

[0181] Screen 6 (35) lists the actions the investor determined to takein Screen 5 (34), to the extent the actions require a transaction ofsome sort, and then seeks confirmation of those actions. If the investorwishes to modify any actions he is returned to Screen 5 (34) foradjustments. After confirmation, any transactions are effected. Thesystem processes and stores the information if it relates to atransaction or requires portfolio adjustments, etc.

[0182] Web Server Program

[0183]FIGS. 9 and 10—together with FIGS. 11 and 12—depict a flow chartof the processing occurring at the Web server. In general the Web serverprovides communications between all investors and other systems externalto the computer-based system of the present invention, such as the thirdparty payment system, and the third party trading system.

[0184]FIGS. 9 and 10 show one of the strong advantages of thecomputer-based system of the present invention: namely that the numberof trades that must be executed externally to the system to implementportfolio adjustments is reduced dramatically. As indicated in FIG. 11,Investor A wishes to buy 100 shares of security A, Investor B wishes tosell 50 shares of security A, and Investor C wishes to buy 150 shares ofsecurity A, giving a total of 250 shares of security A to be purchasedand 50 shares of security A to be sold through the system of the presentinvention. The net result is that 200 shares of security A need to bepurchased by the system of the present invention, which can beimplemented with a single transaction.

[0185] Also shown in FIG. 12, Investor A wishes to buy 200 shares ofsecurity B, Investor B wishes to sell 50 shares of security B, andInvestor C wishes to sell 150 shares of security B, giving a total of200 shares of security B to be purchased and 200 shares of security B tobe sold through the system of the present invention. The net result isthat 0 shares of security B need to be purchased or sold by the systemof the present invention.

[0186] As further indicated in FIG. 11, Investor A wishes to buy 100shares of security C, Investor B wishes to sell 100 shares of securityC, and Investor C wishes to sell 50 shares of security C, giving a totalof 100 shares of security C to be purchased and 150 shares of security Cto be sold through the system of the present invention. The net resultis that 50 shares of security C need to be sold by the system of thepresent invention, again only one trade needs to be executed externallyto the system.

[0187] In this example, the number of trades needed to execute portfoliocreations or adjustments is reduced from 9 to 2 with netting and from 9to 6 without netting. As a further example, assume the invention wasemployed on a system that was being used by 10,000 investors creatingand maintaining their portfolios from a list of 750 stocks. Assumefurther, that each investor is engaging in just five transactionsrelating to his portfolio during a given period. The number oftransactions that would normally have to be sent to an exchange or thirdparty market maker or be executed by the broker as dealer would be50,000. By contrast, employing the invention, the maximum number oftrades the system would theoretically have to execute would be 1500 (twotrades—a buy and a sell—in each stock) assuming no netting of buysagainst sells, and 750 (one trade in each stock) if there is netting ofbuys against sells, i.e., either a single buy or a single sell dependingon whether the total number of shares being bought exceeded the totalnumber of shares being sold or vice versa. In the first case, thecomputer-based system of the present invention saves the costsassociated with 48,500 trades, and in the second case, thecomputer-based system of the present invention saves the costsassociated with 49,250 trades—a ratio of over 30:1 in savings!

[0188] The computer-based system of the present invention, therefore, isadvantageous with or without netting. As a further illustration,increasing the number of investors in the above example to 100,000 wouldincrease the number of trades under ordinary brokerage tohalf-a-million. Employing the computer-based system of the presentinvention, the theoretical maximum number of trades remains at 1500 (or750 with netting). According to the computer-based system of the presentinvention, therefore, increasing the number of investors, or the numberof transactions they wish to engage in, simply increases the likelihoodthat the actual number of trades the system needs to execute will morefrequently approach the applicable theoretical maximum. Costs thereforecan be maintained at a low level in part because so few actual tradesneed to be executed, even assuming every trade is sent to a third partyfor execution.

[0189] Graphical User Interface During Creation/Modification of InvestorPortfolio

[0190]FIG. 13 depicts certain screens that may be presented to theinvestor during various steps in the process of creating or modifying aportfolio.

[0191] Screen A shows one form of a general presentation of the risk 55a and expected differential in return 56 a of a chosen portfolio 57 a ofsix stocks. The benefits of diversification can be obtained by using anumber of securities in the portfolio, with the number usually being inexcess of twenty. In actual operation then, the number of securities inthe portfolio would generally be at least twenty or more since, asnoted, part of the purpose of the invention is to allow the benefits ofdiversification to be provided to the investor. Consequently, unless theinvestor determines otherwise, the number of securities in a portfoliowill usually be at least twenty and generally would be materiallyhigher.

[0192] As the investor increases or decreases the relative percentage ofthe stocks (six shown in this example) in the portfolio there will be acorresponding adjustment in the risk 55 a and return 56 a for theportfolio with the pointers 51 a, 52 a either moving up or down. In thisexample, the strips 53 a, 54 a along which the pointers 51 a, 52 a,respectively, move would be color-coded (much like a litmus testingstrip). The color-coding will be used in connection with thepresentation of the individual stocks in the portfolio as shown inScreen B. The pointers 51 a, 52 a could be a dial, or any other devicefor showing one value relative to another, and could be used with orwithout the color-coding.

[0193] Screen B shows a detail of Screen A with the stocks specified andtheir relative contributions to the portfolio and their respective risks55 b and differential returns 56 b. An investor will instantly be ableto determine which stocks are contributing higher levels of risks andpresumably higher levels of returns to the portfolio and, if desired,adjust them to modify the risk/return levels in the portfolio (but seebelow). Obviously, a number of combinations will not be available aslimited by the specific stocks selected. In that instance, the systemgenerates a statement that the combination requested is not possible andsuggests alternatives such as other securities (e.g., money market fundsor preferred stocks or AAA-rated short-term notes, which in a realportfolio would be added to the mix in Screen A or B) that could loweroverall risk and returns or leveraging (which would be shown as a barincreasing the risk of the portfolio) that could increase it, ordifferent stocks with different characteristics, depending on whatpreferences the investor had earlier inputted into the system.

[0194] Alternatively, and importantly, the investor could adjust thepointers 51 a, 52 a in Screen A up or down (or the hand of a dial, orthe color code on a litmus-type strip, etc.) and the system willrecalculate the required mix of the portfolio's stocks. The investor maybe required to adjust the overall mix of the securities in the portfolioin order to comply with limits established by a plan sponsor oremployer, or the investor itself or by the investor on behalf of anotherover which the investor has authority (which could also be a corporateaccount or some other account where parameters are set by one entity andthe actual trading or execution selection is made by another). Thisimportant dynamic interface is a major advantage of the system in thatit allows investors to adjust their portfolios to desired risk—returncharacteristics by directly adjusting the risk and return pointers ordial or colors and having the system automatically determine what changein weighting of the securities comprising the portfolio is necessary toaccommodate those desired characteristics. Thus, investors are affordeda simple click-of-a-mouse mechanism to adjust their entire portfolio toprecisely the types of portfolio characteristics desired without havingto know about the various interactions of securities with each other orthe portfolio effects of changing one security or another or have anyother knowledge! And as noted above, if the investor wished to make theportfolio similar, or greater or lesser, in risk levels to some otherportfolio, the investor could specify the precise risk level desired byinputting the desired risk level into the system, through any of thesemeans.

[0195] Screen B also shows the calculation of the risk (beta) 55 b-55 hand expected differential return levels 56 b-56 h for the stocks thatare used to calculate the portfolio risk levels 53 a and the expecteddifferential returns 54 a of the portfolio. It would also be made clearthat a principal benefit of the computer-based system of the presentinvention and the concept of using a portfolio for investing instead ofindividual stocks is the notion that the riskiness in any one stock heldin a portfolio may be different from the riskiness of that stock held byitself (thereby generating some of the benefits that stem fromdiversification, etc.). Consequently, investors will be cautioned tofocus on portfolio risk/returns, not individual stock risk/return.Again, then, there is a great advantage to investors as described abovefrom being able to adjust their whole portfolio characteristics justthrough moving a pointer (51 a, 52 a in Screen A up or down (or the handof a dial, or the color code on a litmus-type strip, etc.)), as opposedto having to consider and understand the effects on the portfolio frommodifying individual stock positions. Thus less than expert investors,for example, can have their portfolio adjusted automatically by havingthe system re-weight or add cash, or leverage, when the investor adjuststhe pointers, dials or colors.

[0196] The scales, etc. can all be adjusted to make the presentationeasier to see for different portfolios.

[0197] As shown in screen B, Common stock in company A 57 c has a riskrelative to the S&P 500 of 0.9 (which is blue on the color coded litmustest example) 55 c, it represents 5% of the total value of theportfolio, and its differential return with respect to the S&P 500 isnegative 15% 56 c, which is also depicted in blue. Each of the remainingstocks is represented in a similar manner. In this example, the stocksare listed in alphabetical order, however, they could be ordered in adifferent manner depending on an investor preference selection. Forexample, the investor could adjust the ordering to depict the stocks inorder of total value of the portfolio, from low to high risk or viceversa, etc.

[0198] In any of these instances, the securities that can be viewed asan integrated, single portfolio for the investor can be any securities,including funds or other investments, the investor inputs into thesystem. Consequently, if the investor has a variety of accounts thatmust be maintained as legally disparate and separate accounts, then theinvestor can still view each of them together as a single integratedaccount for purposes of analysis and trade execution by having thesystem include whatever accounts and the securities or other investmentscontained therein as a single account that the investor desires(likewise, the investor can exclude any securities or other investmentshe wishes from being included in an account for purposes of analysis ortrade execution). In this manner, the investor is provided the benefitof being able to integrate easily all his holdings and understand andmanage all his accounts even though they must be maintained in legallyseparate accounts. Therefore, for the first time, an investor that hassecurities in a 401(k), an IRA and a separate trading account, and whohas securities for an account of his children, can view all the holdingsas a single integrated whole and manage them to obtain the benefits ofportfolio theory including to ensure proper levels of diversification,sector exposure, concentration levels, overall risk, etc. The investorwould do this merely by noting the accounts, or the securities or otherinvestments within accounts, to be grouped together for purposes ofacting as a single portfolio. As noted, this aspect of the presentinvention could also be used for similar analyses regarding othersecurities for which risk—return information is available, such as andprimarily, mutual funds.

[0199] Referring to FIG. 15, the natural language investor interactionwith the present invention is illustrated. The system comprises anatural language interface 151, one possible embodiment of which is asoftware program residing on the investor's PC or in the alternative onthe server associated with the present invention. Other possibleembodiments could be hardware implemented modules for interfacing to theinvestor's PC. The investor can input selection criteria in naturallanguage via a keyboard 152 or if desired via a speech processor 153which recognizes the spoken word and provides that translation to thenatural language interface 151.

[0200] After interpretation of the investor's input, the naturallanguage interface 151 provides portfolio and/or securitiescharacteristics 154 to the system. These portfolio and/or securitiescharacteristics are the translation of the investor's desires for aportfolio and/or security into technical terms used more commonly by theinvestment community to describe portfolios and/or securities.

[0201] An alternative input to the system is via a series of cannedqueries 155 that are displayed on an investor's screen. An example of acanned query might be “I want to invest in stocks that give me aportfolio like the market” or “I want to invest in stocks that are bigcompanies.” When an investor clicks on this choice, a series ofportfolio and/or securities characteristics 154 are automaticallygenerated for subsequent use by the system of the present invention.

[0202] If the investor has specified portfolio characteristics, the flowwould proceed to the stock selection mechanism 157 to access informationin a securities database 158 which comprises all manner of securitieswith their associated characteristics. If the investor has specifiedcertain securities characteristics, they are inputted to a file ofcharacteristics 156 which describes the various investment objectives ofan individual. For example, an investor may wish to invest in long termand potentially high yield stocks. The portfolio characteristicgenerator 156 can then generate a series of rules to be used to selectstocks. This rule based stock selection 157 then accesses information inthe securities database 158. Once stocks are selected, they can beoutput 159 in a variety of ways. For example, the results can bedisplayed on an investor's screen, hard copy output can be provided tothe investor, or an electronic file can be sent to the investor forstorage and later access.

[0203] In this fashion a relatively unsophisticated investor can makedesires for securities known in natural language terms yet still use allof the sophistication of the present invention.

[0204] Referring to FIG. 16 the concept of affinity group investing isshown. The present invention first collects investor demographicinformation from each of a plurality of investors 161. That informationis sent to, and aggregated by, a generalized demographic database 162which resides within the overall investor database 163. As mentionedearlier, all of the information in this investor database is generalizedso that the privacy of individual investors is maintained. The mainpurpose of the investor database 162 is to allow subsequent analysis ofinvestor trends and behaviors to be made.

[0205] In a similar fashion to the collection of demographicinformation, individual investor security investments and portfoliocharacteristics are also collected 164. The specific securities investedin by and/or portfolio characteristics of a given investor are then sentto, and aggregated by, a generalized securities and portfoliocharacteristics data base 165. This database associates the investmentsmade by particular groups of investors.

[0206] When an investor desires to enter an affinity group or to seescreens based on group or investor characteristics or do collaborativeinvesting, the investor accesses, via a PC or from a server a series ofaffinity group selection criteria 166. Such criteria might beprofession, annual family earnings, education level, geographic area,and other demographic characteristics. The criteria selected to create aparticular affinity group, is then presented to the investor database163. The affinity group characteristics are retrieved from thegeneralized demographic database 162 and associated with the particularportfolio or securities selected from the generalizedsecurities/portfolio database 165. This information is then used tocreate (depending on what the investor requested) a securities and/orportfolio profile 167 of the particular affinity group. Thissecurities/portfolio profile can then be output 168 to the investor.Alternatively, the securities profile 167 can be input to the securitiesand portfolio database 169 of the present invention so that performanceoutput 170 can be presented to the investor showing how the securitiesinvested in by the particular affinity group actually performed, and canalso be presented to the system for execution or inclusion in theinvestor's portfolio 171. (In a similar manner, any other portfolio thatthe investor may generate through any of the other means describedherein could also be run through the securities/portfolio database 169and be outputted 170 to the investor showing how the portfolio soselected actually performed.)

[0207] In this manner an investor can be quite specific about anaffinity group that the investor wishes to create and identify theperformance of securities and portfolios invested in by that particulargroup.

[0208] In a similar fashion to the affinity investing in individualsecurities as part of or separate from a portfolio as described abovethe present invention allows for affinity investing with respect tomutual funds or other instruments as well. In this instance, theinvestor desires to know what mutual funds a particular group hasinvested in as a basis for making future investment judgments. Again notonly can such affinity group mutual fund investing be determined fromthe investor database, but the performance of the affinity group'sinvestment can also be determined.

[0209] Additionally, if a group of investors so desire, the investorscan all provide information to the system so that other investors whothey permit or who are in their same group can have access to theoverall portfolio of the group as a whole—either for monitoring purposesor for analysis or for trade execution. In such instance the systemwould identify the group as a separate group within the generaldemographic database 163, and access to the portfolio and securitiesmaintained by the group or the leaders of the group (2) would bepermitted to members of the group.

[0210] As noted, there will also be pre-packaged or suggestedportfolios. The present invention will keep track of those portfolios.For example, the Washingtonian picks can be displayed for an investorwho can then be given the option to purchase a basket of securities thatare the same as the expert's picks that have been published. The Dow 500and the Fortune 500 top stocks may also be tracked by the presentinvention with the opportunity given to invest in the same top stocks aslisted in the index or the magazine. Again, performance data on thestocks and portfolios that are potential candidates for investment canbe generated to further inform the investor.

[0211] It is important to note that while the capabilities of thepresent invention to trade in stock and mutual funds has been discussed,the system and method of the present invention is equally well suited toany tradeable security where economies of scale are of importance. Thusfutures, options, bonds and other negotiable securities can equally bethe subject of trading with the present invention.

[0212] An Exemplary Embodiment of the Computer-based System of thePresent Invention

[0213]FIG. 14 depicts an exemplary embodiment of the overall systemaccording to the computer-based system of the present invention. Withinthe computer-based system of the present invention is a server 62, whichexecutes a program B, which controls the operation of the entire system.While another program may execute on the investor's PC 63, program A,the investor's program can be completely performed by program B.Alternatively, these two programs A and B can work together likePointcast, or other similar programs, which download data to aninvestor's terminal and display this data via a graphical investorinterface based on “filter” selections made by the investor. Thus, onepossibility for program A is that it is merely a communication programthat enables the investor to establish a link to the server 62, and set“filters,” which determine what data is sent back and forth to theinvestor. In this case, the so-called filters consist of the stocks inthe investor's portfolio and the investor's risk model, etc. Onceestablished by the investor, the program B then performs all of theanalysis and computation required to advise the investor as to thelevels of risk and differential return inherent in the investor'sportfolio relative to known standards. This enables tight configurationcontrol on the investor software, which makes upgrading and securityprotection easier.

[0214] Alternatively, by placing more of the investor's programfunctionality in program A, the amount of time the server 62 is accessedby the investor is minimal, thereby enabling a cost reduction in thetotal amount of communication links required at the server 62. In thisembodiment, the investor would only access the server to receive thedata regarding the investor's stocks and to pass on new orders once theinvestor determined a new order. The total time accessing the serverwould be similar in this case to accessing one's electronic mail. Thus,there is much flexibility in creating the levels of functionality in thetwo main programs A and B.

[0215] In addition, the investor can access the server 62 via severalcommunication links. First, the investor can access the server 62 viathe Internet 64 using the investor's Internet Service Provider (ISP),which ultimately connects the investor's PC 63 to the server 62.

[0216] Second, the investor can access the server directly using adial-up modem connection. This has the advantage of security in thatmany consider a telephone connection inherently more secure than an openconnection over the Internet.

[0217] Third, the investor can access the server 62 using anintermediary, which provides the service to the investor, such as abank, brokerage, etc. In this case, the investor either accesses theintermediary 65 using a dial-up modem, or via the Internet 64. Once theinvestor accesses the intermediary 65, the intermediary 65 then accessesthe server 62 using either an Internet connection or a dial-upconnection.

[0218] The computer-based system of the present invention also providesfor an electronic payment mechanism 66 to enable the investor to makepayments or transfer funds for investment or otherwise on a periodicbasis, such as monthly, biweekly, etc. This would enable an investor tomatch his investments with his regular salary. The electronic paymentmechanism 66 includes an electronic withdrawal from the investor'schecking/savings account, a payroll deduction, a credit cardtransaction, etc.

[0219] An electronic connection to a third party trading system 67 isalso provided, which enables the program to make the tradeselectronically. Typically, these electronic trading systems 67 include aconnection to a clearinghouse 68 for settlement of the trades. While notpart of the present invention, this is shown for completeness.

[0220] All of these communications links are standard and knowncommunications links, hence no further discussion is necessary. Inaddition, the third party electronic payment system connection consistsof one of the many known ways of making this payment electronically, sono further discussion is required either. Finally, the third partytrading system could consist of a known trading system, such as theOptiMark™ trading system, or other trading system that communicatesusing the Financial Information eXchange (FIX) protocol, hence noadditional discussion is required.

[0221] Operation of the Computer-based System of the Present Invention

[0222] The computer-based system of the present invention is designed toprovide a mechanism for a whole new financial investing system thatcurrently does not exist. It allows investors, with expert assistance,to create, manage and modify a complex portfolio that reflects theinvestor's own preferences. It allows the investor to ensure that hisportfolio is diversified and that it reflects the level of risk hewishes to assume. The computer-based system of the present inventionalso increases the investor's control over matters like what stocks heowns, the taxes he pays, and how his shares will be voted. And itpermits him to purchase and sell whole portfolios and specificsecurities, and fractional interests in shares of securities—all for alow cost that is less than or competitive to trades of single securitiesthrough discount brokers or having an interest in mutual funds.

[0223] Investors (“Users” in FIG. 6) access a server that processes theinformation necessary to enable the investor to create or modify aportfolio in accordance with the computer-based system of the presentinvention. This access is either through the Internet, through a dial-upmodem connection or through an intermediary such as a bank or brokeragethat is making the invention available to investors.

[0224] Investors first accessing the system are provided a range ofsecurity measures to accommodate their own computer systems and theirown concerns. For example, secure encrypted access will be supported forthose investors who have it as part of their Internet browsingcapability. Dial-up modem could also be available, for those who wishnot to rely on the Internet, or investors could also access the systemthrough an intermediary that possesses its own security controls and hasa secure link to the invention processing site, such as a broker orbank.

[0225] In addition, security may be effected through a dial-back ordial-up mechanism. Investors accessing the system over the Internet forthe first time will be provided a password and log-on identificationwithout having to provide any confidential information, such as creditcard information, to the processing site. The site will then call theinvestor back at a number supplied by the investor, or the investor, canaccess the site through a direct telephone call. The investor can thensupply the processing site with the necessary information by touch-toneinput of the site assigned password and the investor's confidentialcredit card information. Once the site has the credit card informationthrough direct telephone connection, it need not be provided to the siteagain and the investor then uses the investor-site-specific password andlog-on identification for communications. Those passwords and log-onswill be useless for any purpose other than communication with the site,and the credit card information never travels on the Internet.

[0226] Once the investor accesses the site though whatever means,initial screens solicit vital information about the investor, such asrange of income, other investments, age, financial responsibilities andfinancial goals and liabilities.

[0227] Investors are then provided information that solicits theirpreferences as to “risk” and “diversification.” Their responses providethe invention the information it needs for its algorithms to workproperly.

[0228] Based on this information, the invention suggests a generalinvestment asset allocation that the investor can modify. Such assetallocation models are relatively standard and in current use. However,the standard models can be adjusted by the investor for use in thesystem to allow the investor to incur additional risk in order toachieve a higher return. The reason for permitting a higher risk-returnlevel than normal is because the investor will be provided theopportunity through the invention to fine-tune—and monitor andmaintain—the level of risk (based on a stock's historical volatility)selected by the investor for the investor's portfolio.

[0229] This fine tuning of portfolio risk will be far more than wouldordinarily be the case, for example, for an investor attempting toselect a mutual fund, because the investor utilizing the invention isable to ensure that the selected investments and their risk profileremain subject to the investor's control. In a mutual fund (other thanpassive or “non-managed” funds), the investor has no assurance as towhat stocks, and what weighting of stocks, will be included in the fundin the future, or how much of the fund will be held in cash, andtherefore no assurance that the fund will not modify its style and“risk” without the investor having advance knowledge of the change. Evenin passive funds there is uncertainty as to how much of the fund is heldin cash at any one time. Consequently, the mutual fund investor incursthe additional risk of the uncertainty as to a mutual fund's riskprofile, thereby increasing the investor's level of risk without theinvestor obtaining any benefit.

[0230] Once the general asset allocation determinations and risk-returnpreferences are made, investors are asked, through simple screens, aboutany preferences they have regarding stocks, such as where securities arelisted, capitalization, and business sector; various financial factorssuch as price/earnings ratio and growth trends, and corporate governancefactors such as whether the company sells specified products, or enjoysgood labor relations, etc. (Determinations regarding subjectivecriteria, such as whether a company has “good” or “bad” governancefactors, would generally come from third party sources.)

[0231] An investor could then specify specific stocks that must, or mustnot, be included in the portfolio. Consequently, the invention also actsas an ordinary broker—with a very low cost that would be expected to bematerially less than even deep discount brokers—when immediate executionis not required or if the system operator is willing to pre-aggregatecertain trades.

[0232] If an investor seeks immediate execution for a selected trade,the invention will provide it, in the same manner as would any otherelectronic discount brokerage, for a fee that would be competitive withor better than that charged by the reputable discount brokers.

[0233] After preferences are entered, the invention will create adiversified portfolio that expertly matches, to the extent possible,those preferences and the asset allocation determination—allautomatically.

[0234] If the portfolio is acceptable, the investor will enter thedollar amount to be invested and the securities will be purchased forthe investor at the invention's next “transaction window”.

[0235] For the invention to work, costs must be kept low so thatinvestors can purchase and modify whole portfolios of securities on afrequent basis. To accomplish this, under one embodiment of theinvention, the invention aggregates the orders entered by the investorsutilizing the invention. The orders are aggregated not for the purposeof attempting to match one investor's order against another investor'sorder, but to reduce the number of actual transactions required to beexecuted by the system. The number of aggregations will depend on thenumber of investors of the system, their usage and other factors, but itis currently contemplated that orders would be aggregated into thosereceived when the market is closed, those received in the morning, andthose received in the afternoon, with transactions effected at themarket open, mid-day and at the market close. If demand warrants, andother factors make it permissible, transactions could also be effectedat other times—such as in the evening or more frequently during the day,if there is a market from which prices can be derived or if there is amarket maker willing to make a market at that time and if it appearsthat effecting a transaction at such time would be consistent with theinterests of investors. Similarly, the system operator (a bank or abroker, for example), could “pre-aggregate” some orders by executingagainst itself as principal and then hold the orders until a transactionwindow or until a certain amount was reached, etc. in order to executethe pre-aggregated orders. For example, the operator could take tenorders from ten customers and pre-aggregate all of them by executingagainst itself as those orders are received, and then take the bulkorder position that it now owns and execute that as another order. Thisstrategy means that the operator has to take upon itself market risk,and also has certain other disadvantages including potentially having totreat each trade as a reportable order for reporting purposes and otherrequirements, but it may be viable for certain small orders.

[0236] Shares can be bought in very, small odd lots (one or two shares),and even in fractions—purchases not possible on a cost-effective basiswith ordinary brokerage.

[0237] All investor actions can be automated, with specified amountsbeing added each week or month from direct deposits and with selectedstocks sold or bought depending on whether they satisfy certaincriteria.

[0238] In subsequent sessions, the investor can modify his portfolio anyway he wishes, including to reflect new preferences, add to it withadditional dollars invested, or sell some or all of the securities inthe portfolio.

[0239] The investor can also have the portfolio analyzed in connectionwith other investments the investor may have, such as funds or otherinvestments held in other accounts, to review and modify a wholeintegrated portfolio.

[0240] The invention will track the tax “basis” and acquisition date instock purchases, and which stocks have gains and which have losses: soan investor can choose to sell stocks to generate capital gains orlosses (long or short term) and thereby manage tax effects.

[0241] Moreover, because the investor actually owns the individualsecurities in the portfolio, instead of just an interest in a fund, theinvestor has the right to vote the underlying stocks (or delegate thevoting in accordance with various instructions), and sell individualstocks when he wishes.

[0242] The computer-based system of the present invention, therefore,provides complete “hands on” portfolio management for the investor whowishes it—those who employ discount brokerage, and those who selectmutual funds on their own—and simple, automatic and expert managementfor an investor who wishes to be completely “taken care of”.

[0243] The strengths and advantages of the invention include relative tomutual funds

[0244] the selection of individual securities to be included in aportfolio;

[0245] management of and clearly superior tax effects;

[0246] the ability to make specific modifications to the portfolio atleast three times a day, including the ability to buy and sellsecurities as a block at the open, mid-day or close instead of just atthe next close as is the case with mutual funds;

[0247] the inclusion of world class securities or selection by sector,price/earnings ratio, governance policies, industry or other factors tosuit investors' preferences at levels not available in mutual funds;

[0248] the ability to exercise voting and other shareholder andcorporate governance rights and decisions—such as whether to tendersecurities in a takeover;

[0249] the ability to control selectively reinvestment of dividends;

[0250] the ability to fine-tune risk-return preferences with completecontrol over what will be included in the portfolio and whether therewill be a change in investment strategy;

[0251] the ability to modify risk levels and portfolios with fewerpotential costs or tax consequences;

[0252] the ability to view multiple investments more easily as fullyintegrated portfolio and manage it as such; and

[0253] the ability to manage costs better.

[0254] Those strengths and advantages relative to discount brokeragesinclude:

[0255] inexpensive and cost-effective manner of creating a diversifiedportfolio;

[0256] ability to acquire small odd lots and fractional shares inmultiple securities at reasonable costs;

[0257] far less cost in purchasing and selling individual securities(assuming immediate execution is not required)—as compared even to thedeepest discount brokers;

[0258] ability to establish portfolio wide limitations and parameterssuch as required diversification of a portfolio and maximum risk levels;

[0259] monitoring of portfolio based-tax effects;

[0260] assistance in defining diversification and selection of stocksthat satisfy diversification goals;

[0261] assistance in defining other factors and investor preferences andselection of stocks that satisfy those other preferences and goals; and

[0262] a likelihood of obtaining better execution than can be obtainedthrough discount brokers due to matching of trades.

[0263] One exemplary embodiment of the present invention is for use inself-managed 401(k) accounts. By placing certain restrictions on therisk levels and a minimum number of assets/liabilities, the system canoperate as a self-managed 401(k). For example, an employer may want topermit its employees to manage their own accounts, without incurringcosts to the employer. So, once the plan is established, the individualaccounts are billed a relatively low monthly fee (or small asset basedfee) for enabling the user to be a self-managed account. But to protectthe employer, the accounts would have certain restrictions placed onthem so that an employee cannot invest all of his account into a singlestock, for example, or create a portfolio with extremely high risklevels. The program can be set up to prevent execution of trades thatviolate these base parameters, and inform the user of the reason fornon-execution.

[0264] Another exemplary embodiment of the present invention is for useby an existing brokerage company that permits its investors/customers tocreate a portfolio, as described above, and trade that portfolio via thebrokerage company. Once the portfolios reach the central computer, theyare broken down into their constituent trades. At this point, there areseveral possibilities. One, the trades can be aggregated, and nettedagainst one another, leaving only a small number of shares to either bepurchased or sold for each asset/liability. In this case, the brokeragecompany can undertake the risk that the stock will go up or down andsimply reallocate the ownership of the stocks within the company andthen at the end of the day (or several times throughout the day) executea trade to remove any risk. Two, the trades can be continuously executedas they arrive, thereby reducing any risk. In this case, the investorsare still investing portfolio's, but the company is handling theunderlying transactions to implement the desired portfolios. Third, thetrades can simply be aggregated until reaching a certain size (either indollars or numbers of share), at which point they are executed.

[0265] Other Applications

[0266] The computer-based system of the present invention can be used byordinary investors to manage other “things” such as options andcommodities trading, bonds, foreign equities, or used for investmentbanking for the trading of, for example, derivatives. The computer-basedsystem of the present invention can be used to establish a system tocreate and manage a portfolio of any assets or liabilities orcombination thereof that can be traded, and provides benefits wheneverdiversification or utilization of portfolio concepts is an advantage (aswould be the case with most financial assets). For example, as describedabove the invention could be used for any security, including foreign ordomestic equities, options, warrants, bonds, notes, limited partnershipinterests, private placement securities or otherwise. In addition, theinvention could be used for commodities, futures, bank loan syndicationinterests and novel assets or liabilities that are traded such aspollution rights (including global warming and air/water pollutionrights) or insurance claim interests. The method of: 1) obtainingpreferences for portfolio characteristics of investors; 2) employingthose preferences to describe and select items to be transacted; 3)analyzing and transacting on such assets as a portfolio as opposed to asseparate assets; 4) aggregating such transactions over an applicablecharacteristic, such as a time period (for example, every three hours)or a time certain (for example, at 9:30 am, 12:30 pm and 4:30 pm) or anamount (for example, having 1,000 transactions, or transactions totaling$5,000, aggregated) or otherwise; and 5) executing the transactions asaggregated and, if applicable, netted, transactions can be applied toany of these items.

[0267] In addition, obtaining investor risk preferences and otherinformation allows for appropriately focused private placement and otheropportunities to be presented to investors.

[0268] Furthermore, the present invention makes possible thediversification for smaller investors that venture capitalists obtain inprivate placement investment by investing in multiple privateplacements. For example, most venture capitalists invest in multipleprivate placements, which are normally high risk/rate returninvestments. By investing in several, the venture capitalists are ableto reduce their risk because the likelihood increases that one of theprivate placements will be successful, thereby offsetting losses in theothers.

[0269] The present invention makes possible this same opportunity, butat a lower scale, to smaller investors. For example, by enabling privateplacements to be listed as any other stock, the system enables theinvestor to select that private placement for investment. By selectingseveral of these, the investor can spread the risk across many of theseinvestments, thereby reducing the overall risk.

What is claimed is:
 1. A method for managing an investment account for acustomer associated with a sponsoring organization comprising the stepsof: interacting with the customer over a computer network to create aportfolio of investments that satisfy a plurality of restrictions oninvestment activity of the customer while meeting pre-defined investmentneeds of the customer; and transmitting a resulting portfolio of desiredinvestments over the computer network for execution.
 2. A method formanaging a plurality of investment accounts, each of which is associatedwith a third party user, comprising the steps of: receiving data fromthe user regarding the plurality of investment accounts, the datadefining an amount and types of investments to be included in eachinvestment account; aggregating the plurality of investment accountsinto a single portfolio of investments for the user; and analyzing thesingle portfolio to determine a risk/reward characteristic of the singleportfolio.
 3. A method for creating a plurality of separate investmentaccounts while managing the plurality of separate investment accounts asa single investment portfolio, comprising the steps of: establishing aseparate file for each of the plurality of separate investment accounts;and analyzing the plurality of separate investment accounts as if theplurality of separate investment accounts were a single investmentportfolio, the analysis including at least one of: a risk levelanalysis, a diversification analysis, a concentration analysis and asector exposure analysis for the single portfolio.
 4. A method formanaging an investment account of a plurality of customers associatedwith a sponsoring organization, comprising the steps of: establishing aplurality of defined restrictions on the investment activity of theplurality of customers associated with the sponsoring organization;interacting with a first customer over a computer network to identify aportfolio of investments that satisfy the plurality of definedrestrictions while meeting customer defined investment needs of thefirst customer; establishing an aggregate portfolio of investments fromthe first customer and from a plurality of other customers; andtransmitting a plurality of trade requests over a computer networkidentifying a plurality of investments in the aggregate portfolio.
 5. Amethod for creating a plurality of separate investment accounts whilemanaging the plurality of separate investment accounts as a singleportfolio, comprising the steps of: calculating a risk/reward analysisfor each of the plurality of separate investment accounts; andreceiving, for each of the plurality of separate investment accounts,from a customer an indication of the customer's preferences regardingsaid risk/reward analysis.